Did Virginia use tax apply to tools first received and controlled in Virginia before being sent to out-of-state power plants?

Plain-English summary

Virginia upheld use tax because the turbine manufacturer first took possession and exercised control over the tools in Virginia. The tools were later sent to power plants in other states, but that later shipment did not erase the taxable Virginia use.

The Department described use tax as a “moment of transaction” tax incurred at the first Virginia use. It relied on a Virginia Supreme Court decision holding that storage in Virginia was taxable even when property was ultimately destined for another state.

Virginia taxation did not prevent another state from taxing later use. The ruling said other states generally allowed a credit for sales or use tax paid elsewhere and directed the taxpayer to contact those states about available credits.

What this means for you

• First possession, storage, or control in Virginia can trigger use tax before equipment leaves the state.
• A later out-of-state job does not automatically immunize an earlier Virginia taxable event.
• Multistate credits, rather than exemption of the first use, may address duplicate tax.
• Shipping and custody records are critical when tools move through multiple states.

Common questions

Did the tools have to be used on a Virginia job to be taxable?

No. The ruling treated possession and control in Virginia as sufficient first use.

Did later shipment outside Virginia cancel the tax?

No. The cited court rule said later delivery did not immunize a taxable Virginia event.

How was possible double taxation addressed?

The ruling pointed to credits that may be available from the states of later use.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-604.
• 23 VAC 10-210-6030(A).
• Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980).

Subject

Assessment of use tax on untaxed purchases of tools shipped into Virginia

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-17

Original ruling text

March 27, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period August 2000 through June 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer manufactures steam and gas turbines. An audit by the Department resulted in the assessment of use tax on untaxed purchases of tools shipped into Virginia. These tools were purchased for use at various locations throughout the United States, none of which are located in Virginia. The tools were used to service turbines currently in service at existing power plants.

The Taxpayer contends that the contested tools are not subject to the Virginia retail sales and use tax because they were shipped to a Virginia location and then taken to other states for use. The Taxpayer maintains that the application of Virginia use tax in this situation is unconstitutional, as it violates the Commerce Clause, and subjects the Taxpayer to double taxation.

DETERMINATION

Virginia Code § 58.1-604 imposes the use tax "upon the use or consumption of tangible personal property in this Commonwealth. "Use" is defined in Va. Code § 58.1-602 as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." (Emphasis added.) Title 23 of the Virginia Administrative Code 10-210-6030 A provides that "the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased."

This regulation establishes the principle that the use tax is a moment of transaction tax, i.e. , tax liability is incurred at the moment of first use in Virginia. Upon taking possession of the tools within Virginia, and exercising dominion and control over them in Virginia, the Taxpayer made a taxable use of such items within Virginia, notwithstanding their subsequent shipment out of state.

This position is supported by the opinion of the Virginia Supreme Court in Commonwealth v. Miller-Morton , 220 Va. 852, 263 S.E.2d 413 (1980), which held taxable the storage of tangible personal property in Virginia even though the property would ultimately be shipped outside the state. The tax liability is incurred by the Taxpayer at the moment the property is brought into Virginia and stored for use by the Taxpayer. Further, the Court held that "if a taxable event occurs in Virginia, subsequent delivery outside this state does not immunize the taxable event."

The taxation of the property by Virginia does not prevent other states from imposing their taxes when the property is used in such other states. Generally, other states allow a credit against their sales or use tax for taxes paid elsewhere when goods are first used in another state and are then imported into their states by contractors for use in real property contracts. The Taxpayer should contact the state taxing authority for the states in which sales or use tax was paid.

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections and the regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/55744i