Did a Virginia flower-bulb seller owe use tax when it removed unsalable bulbs from resale inventory and donated them to charities?

Subject

Application of tax on donated flower bulbs

Plain-English summary

Virginia ruled that the flower-bulb seller owed use tax when it withdrew bulbs from resale inventory and donated them to charitable organizations. The business had acquired the inventory without tax for resale, but a gift or donation was a use of the property rather than a retail sale in the ordinary course of business.

Under 23 VAC 10-210-490, property removed from untaxed inventory for personal use, a gift, donation, promotion, or free distribution is taxable at its cost price unless the transfer is otherwise exempt. The fact that the bulbs were no longer viable enough to sell did not create an exemption in the ruling.

The seller's catalogs were governed by a different, specific provision. Catalogs stored in Virginia for 12 months or less and distributed outside Virginia could qualify for exemption, while the 5% distributed to Virginia residents was taxable. That catalog rule did not apply to donated bulbs.

What this means for you

• Resale inventory can become subject to use tax when a retailer gives it away or donates it.
• Charitable recipients do not automatically make the donor's inventory withdrawal exempt.
• The tax applies to the cost price of the withdrawn property under the cited regulation.
• Product donations and promotional catalogs must be analyzed under their own separate provisions.

Common questions

Q: Were the donated bulbs exempt because the recipients were charities?
A: No exemption was established on the facts presented, so the retailer owed use tax on the withdrawal.

Q: Did the bulbs' reduced viability eliminate the tax?
A: No. The ruling treated them as inventory withdrawn for donation.

Q: Why were some catalogs treated differently?
A: Virginia had a specific exemption for qualifying catalogs distributed outside the state; that exemption did not cover other property.

Citations and references

• Va. Code § 58.1-602 and § 58.1-609.6 4.
• 23 VAC 10-210-490.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-59

Original ruling text

May 19, 2008

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") requesting a ruling on the application of the retail sales and use tax to flower bulbs that the Taxpayer donates to charitable organizations.

FACTS

The Taxpayer is in the business of selling flower bulbs. When the bulbs are no longer viable enough to be sold, the Taxpayer donates the bulbs to charitable organizations. The Taxpayer was audited by the Department and held taxable on the donated bulbs. The Taxpayer questions the tax and requests a ruling regarding the application of tax on the donated bulbs. The Taxpayer also questions the difference between the application of tax to catalogs it distributes and the donated bulbs.

RULING

Flower Bulbs

Title 23 Virginia Administrative Code (VAC) 10-210-490 states, "Any person who withdraws any item of tangible personal property for his own use from an inventory on which no tax has been paid must report tax on the cost of all property withdrawn for purposes other than sale. For example, a retailer who purchases an inventory of clothing exempt from the tax for the purposes of resale, and who withdraws an item from such inventory for personal use, gift or donation, must report tax on the cost price of such item unless such gift or donation is otherwise exempt. Similarly, an item withdrawn from inventory for a promotional give-away or other free distribution, is subject to the tax at the time of withdrawal."

Virginia Code § 58.1-602 defines "use," in pertinent part, 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."

In this instance, the Taxpayer withdraws property from its inventory for purposes other than resale. Pursuant to Title 23 VAC 10-210-490 and Va. Code § 58.1-602, the Taxpayer is liable for the use tax when it withdraws bulbs from its inventory and donates the bulbs to charitable organizations. The withdrawal of inventory represents a use of the property by the Taxpayer for which it is required to remit the use tax to the Commonwealth.

Catalogs

Pursuant to Va. Code § 58.1-609.6 4, catalogs that are stored for 12 months or less in Virginia and are distributed for use outside of Virginia are exempt from the sales tax. This exemption from the retail sales and use tax is very specific and applies to catalogs only. It does not apply to the distribution of any other tangible personal property.

Based on the exemption in Va. Code § 58.1-609.4, the Taxpayer would be liable for the tax on any catalogs distributed within Virginia. If a portion of the Taxpayer's catalogs is distributed outside of Virginia and a portion is distributed within Virginia, the Taxpayer would be liable for the tax on the portion that is distributed within Virginia. In this instance, you indicate that five percent of the Taxpayer's catalogs are distributed to Virginia residents. Accordingly, five percent of the catalogs would be subject to the tax.

The application of the retail sales and use tax to the donated bulbs and the application of tax to catalogs are governed by separate and distinct sections of the retail sales and use tax law. Accordingly, the manner in which the tax applies to the catalogs has no bearing on application of the tax to the donated bulbs.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1805960918P