Did Virginia tax apply when vendors shipped goods directly to a company's franchisees outside Virginia under out-of-state delivery contracts?

Subject

Items shipped by the vendors directly to franchisees located outside Virginia are not taxable

Plain-English summary

Virginia abated use tax on goods that vendors shipped directly to the taxpayer's franchisees outside Virginia. The audit had treated the taxpayer as constructively possessing the items in Virginia before their shipment.

The taxpayer's contracts required out-of-state delivery, and the taxpayer said title, risk of loss, and physical possession did not pass until the merchandise reached the recipients. It relied on Virginia's interstate-commerce exemption and court decisions recognizing exemption when goods were delivered to out-of-state recipients, even if the recipient was not the purchaser.

Virginia agreed that the contested transactions were not completed until physical delivery outside the Commonwealth. It therefore removed the tax assessed on those transactions.

What this means for you

• Direct vendor delivery to an out-of-state recipient can qualify as an exempt interstate transaction.
• Contract terms governing delivery, title, possession, and risk of loss are important evidence.
• The out-of-state recipient need not necessarily be the purchaser for the transaction to qualify.
• Keep purchase and shipping documents that establish where contractual delivery occurred.

Common questions

Why did the audit originally impose tax?

The auditor concluded that the taxpayer exercised constructive possession in Virginia before shipment to the franchisees.

What fact changed the result on appeal?

The contracts required delivery outside Virginia, and completion occurred when the recipients physically received the goods there.

What relief did Virginia grant?

It abated the contested assessment.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, and 58.1-609.10(4).
• 23 VAC 10-210-780.
• Hennage Creative Printers, Inc. v. Department of Taxation, 9 Va. Cir. 104 (1987).
• Bloomingdale's Inc. v. Department of Taxation, Richmond Circuit Court No. CL05T001891-00-1/07-3860 (2007).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-161

Original ruling text

August 6, 2010

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to * (the Taxpayer) as a result of an audit for the period January 2005 through December 2007. I apologize for the delay in responding to your letter.

FACTS

As a result of an audit, the Taxpayer was assessed consumer use tax on purchases of tangible personal property used in its operations. The auditor also assessed use tax on various articles of tangible personal property shipped from the vendor directly to franchisees of the Taxpayer located throughout the United States on the basis that the Taxpayer exercised taxable constructive possession of the items in Virginia before their shipment to out-of-state franchisees.

The Taxpayer contends that the items shipped by the vendors directly to franchisees located outside Virginia are not taxable because title and possession of the purchased items passed outsides Virginia in accordance with contractual obligations. As such, the Virginia sales or use tax is not applicable. For defining where title passes, the Taxpayer cites the Uniform Commercial Code (UCC) of Virginia, specifically Va. Code § 8.2-401(2). The Taxpayer maintains that the UCC applies to the Virginia Retail Sales and Use Tax Act because the Virginia Code is one body of law, and the Supreme Court of Virginia uses the UCC to determine where a sale occurs when interpreting statutes. The Taxpayer requests abatement of the contested tax.

DETERMINATION

Virginia Code § 58.1-602 defines a "sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration . . . ." Virginia Code § 58.1-603 imposes the sales tax on the gross sales price of tangible personal property when sold at retail or distributed in this Commonwealth. Virginia Code § 58.1-609.10 4 provides an exemption from the retail sales and use tax for:

Delivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth. Delivery of goods destined for foreign export to a factor or export agent shall be deemed to be delivery of goods for use or consumption outside of the Commonwealth.

Interpreting the above statute is Title 23 of the Virginia Administrative Code (VAC) 10-210-780, which provides the following:

The tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.

The Taxpayer contends that the regulation conflicts with the plain meaning of the statutes, which look exclusively to where transfer of title or possession actually occurs and contain no requirement that an item must be delivered to the purchaser in order to constitute a sale in interstate commerce. Furthermore, based on the Virginia UCC, the Taxpayer contends that a sale that calls for the delivery out of state with risk of loss being retained until title and physical possession is transferred, is completed in the state of physical delivery and thus exempted from the Virginia sales tax. In addition to these contentions, the Taxpayer cites the decisions made in Hennage Creative Printers, Inc. v. Department of Taxation , 9 Va. Cir. 104 (1987) and Bloomingdale's Inc. v. Department of Taxation , Circuit Court of the City of Richmond, At Law No. CL05T001891-00-1/07-3860 (2007) as further support for removing the contested sales from the audit.

In Hennage , the court rejected the Department's requirement that delivery be to the buyer outside the Commonwealth because no such requirement existed in either the statute or the regulation for the period in question. Hennage raised an issue with respect to the former interstate commerce regulation ( i.e. , §1-51) in effect before its 1985 revision. Effective in 1985, the revised regulation ( i.e. , Title 23 VAC 10-210-780) requires delivery directly to the buyer outside of the Commonwealth in order for a sale to be deemed an exempt sale in interstate commerce. This revision was done although the statute ( i.e., Va. Code § 58.1-609.10 4) was not changed to require direct delivery to the buyer.

In Bloomingdale's , the Circuit Court determined that retail sales of tangible personal property were exempt sales made in interstate commerce when delivered to recipients in other states regardless of whether the recipient was the purchaser or another person. The court found that Bloomingdale's Inc. retained title and risk of loss until delivery occurred outside Virginia. The Taxpayer maintains that the decision in Bloomingdale's is clearly dispositive of the taxability of the contested transactions, and the denial of the petition for appeal by the Supreme Court of Virginia in the Bloomingdale's case effectively establishes the ruling in Bloomingdale's as the law of the Commonwealth. As support, the Taxpayer cites the opinions of Bowman v. Commonwealth, Va. Ct. Appeal (1989); Saunders v. Reynolds , 214 Va. 697 (1974); and Wright v. West , 505 U.S. 277 (1992).

In this case, the Taxpayer claims that the contractual delivery of the goods at issue was not completed until the goods were physically delivered to the recipients outside Virginia. Based on all the foregoing, I agree and find basis for correcting the assessment to remove the sales tax assessed on sales transactions requiring the delivery of merchandise to recipients outside Virginia.

CONCLUSION

The contested assessment will be abated in accordance with this determination. The Cods 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,

Linda Foster

Deputy Tax Commissioner

AR/1-3302232842.R