Did Virginia salespeople create collection nexus for an out-of-state modular-home manufacturer before it registered for sales tax?

Subject

Taxpayer assessed sales tax on all sales transactions made prior to its registration

Plain-English summary

Virginia upheld the pre-registration sales-tax assessment because the out-of-state modular-home manufacturer had salespeople actively soliciting business in Virginia. Its representatives traveled throughout the state to develop accounts and work with customers, and one salesperson lived in Virginia. The Commissioner found that activity sufficient under Va. Code § 58.1-612(C)(2) and the cited U.S. Supreme Court nexus cases.

The manufacturer therefore should have registered and collected Virginia sales tax before February 2005. Its argument that customers should bear collection responsibility did not eliminate the seller's liability.

For this first audit only, Virginia offered a limited credit for particular modular-home sales if the manufacturer proved within 60 days that the customer either paid consumer use tax to the Department or resold the modular sections without installation to another dealer or contractor.

No penalties had been assessed. Interest remained mandatory because Virginia lacked use of the tax money during the period it was due.

What this means for you

• In-state employees, contractors, agents, or representatives who solicit orders can create a collection duty for an out-of-state seller.
• Registering later does not erase liability from earlier nexus periods.
• Customer-paid use tax or documented resale may prevent duplicate tax on particular transactions, but proof is required.
• A first-audit penalty waiver does not eliminate statutory interest.

Common questions

Was the assessment automatically reduced? No. The manufacturer had 60 days to provide transaction-specific evidence for the conditional credit.

Were penalties and interest both waived? No penalties were imposed, but interest was required.

Citations and references

• Va. Code §§ 58.1-612(A), (B)(2), (C)(2), and 58.1-1812.
• 23 VAC 10-210-2030(C).
• Standard Pressed Steel Co. v. Washington Department of Revenue, 419 U.S. 560 (1975).
• National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-42

Original ruling text

April 17, 2008

Dear *:

This is in response to your request for correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period October 2003 through December 2006. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a modular home manufacturer located outside Virginia. The Taxpayer had voluntarily registered to collect the Virginia retail sales tax beginning February 2005. An audit showed, however, that the Taxpayer had been actively soliciting in Virginia and making retail sales to Virginia customers since October 2003. Accordingly, the Taxpayer was assessed sales tax on all sales transactions made prior to its registration.

The Taxpayer disputes the entire assessment and contends that its Virginia customers should be liable for collecting and remitting the sales tax. The Taxpayer also requests abatement of all penalties and interest.

DETERMINATION

Virginia Code § 58.1-612 A requires collection of the retail sales and use tax by all persons who are dealers and who have sufficient contact with Virginia. Virginia Code § 58.1-612 B lists eight different definitions of the term "dealer." When a person is engaged in importing tangible personal property into Virginia from another state for sale at retail, or for consumption or distribution in Virginia, it is deemed a dealer pursuant to Virginia Code § 58.1-612 B 2. To address the question of whether a dealer has sufficient contact with Virginia to require it to register to collect the sales tax, we look to Virginia Code § 58.1-612 C. The facts presented suggest that the Taxpayer satisfies Virginia Code § 58.1-612 C 2, which states that a dealer has sufficient activity within Virginia to require it to register and collect the sales tax if it "Solicits business in this Commonwealth by employees, independent contractors, agents or other representatives."

For the period in question, I understand that the Taxpayer had one or more salesmen in Virginia soliciting business by actively traveling throughout Virginia to set up new accounts and working with customers. I understand that one of those salespersons lived in Virginia and called upon Virginia businesses on behalf of the Taxpayer during the period in question. Under these circumstances, the Taxpayer has sufficient contact in Virginia to satisfy Va. Code § 58.1-612 C 2.

Further, based on a review of U.S. Supreme Court decisions the Taxpayer has sufficient nexus under the Due Process and Commerce clauses of the United States Constitution. Citing Standard Pressed Steel Co. v. Washington Rev. Dept. , 419 U. S. 560 (1975), the U.S. Supreme Court in National Geographic Society v. California Board of Equalization , 430 U.S. 551, 557 (1977) ruled that sufficient nexus was established by an out-of-state corporation doing business in the taxing state of Washington. Nexus was established by a single employee "whose office was in his Washington home and whose primary responsibility was to consult with the Washington-based customer regarding its anticipated needs for the out-of-state supplier's product." The employee "made possible the realization and continuance of valuable contractual relations between [the seller and its Washington customer]."

Based on the foregoing and the available facts, the Taxpayer's solicitation activities in Virginia are sufficient, under the court's standard and Virginia's statute, to establish nexus with Virginia for the period in question. Consequently, the Taxpayer should have been registered for the collection of the Virginia retail sales and use tax prior to February 2005.

Because of the specific circumstances of this case and for this audit only , I will allow a credit against the sales tax assessed on the modular homes if the Taxpayer is able to furnish sufficient evidence that its Virginia customers (i) remitted the consumer use tax to the Virginia Department of Taxation with respect to any of the modular home sales held in this audit, or (ii) resold the modular sections without installation to another dealer or contractor. Such evidence should be received by the Department's auditor within 60 days from the date of this letter. The auditor will contact you to arrange for the receipt and review of such information.

With respect to your request for waiver of penalties and interest, no penalties were assessed in this first audit. Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer was assessed interest because the Commonwealth did not have use of the assessed tax revenue. For further information, see Title 23 of Virginia Administrative Code 10-210-2030 C.

CONCLUSION

Based on this determination, the assessment is correct. The audit may be revised, however, if the Taxpayer furnishes the requested tax credit evidence within the time allotted. Upon completion of the revision or the end of the allotted time period, whichever is later, an updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its 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 regulation cited 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 Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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