Did a parent's purchase and accounting transfer of equipment to its subsidiary count as one Virginia sales-tax transaction?

Subject

Parent's equipment purchase and transfer to its subsidiary were separate transactions

Plain-English summary

Virginia treated a parent's purchase of equipment and its transfer to a subsidiary as two separate sales-tax transactions. Vendors billed and were paid by the parent, equipment went directly to the subsidiary, and intercompany entries moved the asset liability between their books. Virginia said those accounting entries were consideration even without a cash payment or parent possession.

The parent therefore made a sale to the subsidiary and had to collect and remit Virginia sales tax on that transfer. Double taxation was avoided through the resale exemption: the parent could give vendors resale certificates when buying equipment for the subsidiary, provided the parent made no use of it before transfer.

What this means for you

• Separate corporations remain separate sales-tax persons even when one wholly owns the other.
• Intercompany journal entries can constitute consideration for a taxable sale.
• Direct delivery to the subsidiary and absence of a cash invoice did not merge the transactions.
• The parent should structure the vendor purchase as a resale purchase rather than pay tax twice.
• Any use by the parent before transfer could change the resale analysis.

Common questions

Did Virginia view the vendor purchase and subsidiary assignment as one transaction?

No. The initial purchase and later intercompany transfer were separate transactions.

Why was the transfer a sale without cash changing hands?

Virginia treated the intercompany accounting entries recording the transfer as consideration.

How could the companies avoid double taxation?

The parent could issue properly executed resale exemption certificates to vendors, make no use of the equipment, and collect tax on the sale to the subsidiary.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-604(3).
• 23 VAC 10-210-280.
• Virginia Public Documents 04-134 and 89-150.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-124

Original ruling text

July 7, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your request for a ruling concerning the application of the retail sales and use tax to certain business activities between a parent corporation ("Company A") and a subsidiary ("Company B"), collectively, (the "Taxpayers"). I apologize for the delay in the Department's response.

FACTS

Company A is an out-of-state corporation that is registered in Virginia and files sales and use tax returns. Company B is a wholly owned subsidiary of Company A that is located in Virginia and also files sales and use tax returns. Company A purchased Company B and, for administrative convenience, began performing some of Company B's accounting functions. These functions include accounts payable, accounts receivable and tax compliance.

Company A purchases equipment on behalf of Company B. Company A issues the purchase orders for the equipment to vendors. The vendors invoice and are paid by Company A. The purchased equipment is delivered directly to Company B. Company A does not take possession of the equipment at any time. The equipment purchases are booked as assets on the books of Company B and intercompany journal entries are made to remove the liability for the assets on Company A's books. Company A does not invoice Company B for the equipment purchases and there is no transfer of cash from Company B to Company A. Company A pays the sales tax billed by vendors for the equipment or accrues and pays use tax to Virginia when vendors do not charge Virginia sales tax.

RULING

Question

Under the facts presented above, will the assignment of equipment from Company A to Company B, on which Company A has already paid sales or use tax, cause the equipment to again be subject to sales or use tax in Virginia?

The Taxpayers maintain that the purchase and subsequent assignment of the equipment by Company A to Company B cannot be subject to Virginia tax a second time based on Va. Code § 58.1-604 3, which states, "A transaction taxed under § 58.1-603 shall not also be taxed under this section, nor shall the same transaction be taxed more than once under either section." The Taxpayers believe that the purchase and assignment of the equipment is part of the same transaction, as Company A does not take possession of or make any use of the purchased equipment.

Definition of Sale

"Sale" is defined in Va. Code § 58.1-602 as "any transfer of title or possession, or both, exchange, barter, lease or rental, ... in any manner or by any means whatsoever, of tangible personal property ... for a consideration ...." The Department has issued several public documents that consistently state that intercompany accounting entries to record transactions between related but separate entities constitute consideration for sales and use tax purposes. For example, Public Document (P.D.) 04-134 (9/16/04) discusses a corporate reorganization in which assets were transferred between separately incorporated subsidiaries with a common parent. The transfers were recorded as an adjustment of intercompany balances on the subsidiaries' books. There were no direct payments of cash, exchanges of stock or lines of credit issued between the subsidiaries. The Tax Commissioner ruled that, based on the definition of "sale," the paper or accounting entries that recorded the transfers were consideration and the asset transfers were sales and subject to retail sales and use tax.

Based on the information provided, the transfers of equipment from Company A to Company B are considered sales. Company A should collect the appropriate Virginia sales and use tax on sales of equipment to Company B and file returns with the Department to report and remit the tax collected.

Resale Exemption

Under the facts presented, the purchase and subsequent assignment of the equipment is not one transaction as the Taxpayers suggest. The initial purchase is one transaction and the transfer or assignment of the equipment from Company A to Company B is a separate transaction. However, the application of the resale exemption prevents the double taxation of the equipment. "Retail sale" is defined as "a sale to any person for any purpose other than for resale ...." While Company A is deemed to be making sales of the equipment to Company B, the purchase of the equipment by Company A qualifies for the resale exemption. In accordance with P. D. 89-150 (4/28/89), Company A should issue its vendors properly executed resale exemption certificates for purchases of equipment made on behalf of Company B, provided Company A makes no use of the equipment prior to transferring the equipment to Company B. See Title 23 of the Virginia Administrative Code 10-210-280 for information regarding the proper use of exemption certificates.

The Code of Virginia sections, regulation and public documents 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 concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3328243309.S