Did an out-of-state internet seller have to collect Virginia sales tax because its resale inventory was stored in a Virginia fulfillment center?

Subject

Retail sales and use tax obligations - sales to Virginia customers via the Internet or through a fulfillment center located in Virginia.

Plain-English summary

An out-of-state internet seller had no Virginia activity except resale inventory stored in an unrelated third-party fulfillment center. It asked whether that inventory required Virginia sales-tax registration.

Virginia said yes. Effective June 1, 2017, Va. Code § 58.1-612 C 9 treated ownership of goods for sale located in Virginia as sufficient activity to require registration. The seller's inventory at the fulfillment center therefore created a collection duty.

The seller had to collect Virginia tax on all sales to Virginia customers, file the out-of-state dealer return, and allocate local tax to the localities where products were delivered. The ruling was expressly prospective from June 1, 2017 and limited to the stated facts.

What this means for you

• Inventory stored by a fulfillment provider can create physical nexus.
• The inventory need not be stored in a facility the seller owns.
• Local tax allocation follows the Virginia delivery location described in the ruling.
• Current sellers must also check later economic-nexus and marketplace-facilitator rules.

Citations and references

• Va. Code §§ 58.1-603, 58.1-612 B 3 and C 9, and 58.1-602.
• House Bill 2058 and Senate Bill 962, 2017 Acts of Assembly, Chapters 51 and 808.
• Virginia Tax Bulletin 17-3.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-102

Original ruling text

June 21, 2017

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which * (the “Taxpayer”) seeks guidance as to its retail sales and use tax obligations on sales made to a Virginia customer via the Internet or through a fulfillment center located in Virginia. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a dealer located outside Virginia. You represent that the Taxpayer has no physical activities or business presence in Virginia except resale inventory located in the warehouse of an unrelated third party fulfillment Center. The Taxpayer has been advised that because it is selling products through a fulfillment center located in Virginia, the Taxpayer may be required to collect and remit the Virginia retail sales tax on sales made to Virginia customers. The Taxpayer seeks a ruling as to whether it has sufficient activity within Virginia to require registration for the collection and remittance of the Virginia retail sales and use tax.

RULING

Virginia Code § 58.1-603 imposes the retail sales and use tax on every person “who engages in the business of selling at retail or distributing tangible personal property.” The tax is collected by all persons who are “dealers” as defined in Va. Code § 58.1-612. Pursuant to subsection B 3 of this statute, the term “dealer” includes any person who:

Sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.

A “sale at retail” is defined as “a sale to any persons for any purpose other than for resale in the form of tangible personal property or services.” A “sale” is defined as “any transfer of title 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.” See Va. Code § 58.1-602.

Based on the information provided, the Taxpayer clearly qualifies as a dealer for purposes of the Virginia retail sales and use tax. What needs to be determined is whether the Taxpayer has sufficient activity within Virginia to require registration as a dealer for collection and remittance of the Virginia retail sales and use tax. You represent that the only presence the Taxpayer has in Virginia is the storage of resale inventory in a fulfillment center located in Virginia.

During its 2017 session, the Virginia General Assembly passed House Bill 2058 and Senate Bill 962 (2017 Acts of Assembly , Chapters 51 and 808) to amend Va. Code § 58.1-612 C. Virginia Code § 58.1-612 C sets forth those activities that a dealer may be engaged in that establish nexus with Virginia and require the dealer to register for the collection of the Virginia retail sales and use tax. Subdivision 9 of § 58.1-612 C was amended to provide a dealer shall have sufficient activity to require registration if the dealer:

Owns tangible personal property that is for sale located in this Commonwealth , or that is rented or leased to a consumer in this Commonwealth, or offers tangible personal property, on approval, to consumers in the Commonwealth. [Emphasis added.]

The amendment is effective June 1, 2017.

Based on the nexus requirement set forth above in Va. Code § 58.1-612 C 9 and the fact the Taxpayer owns tangible personal property for sale located in a fulfillment center in the Commonwealth of Virginia, the Taxpayer has sufficient activity in Virginia to require it to register for the collection and remittance of the Virginia retail sales and use tax on all sales to Virginia customers. As an out-of-state dealer, the Taxpayer would be required to file a monthly Form ST-8, Out-of-State Dealer's Sales Tax Return, along with Form ST-8A, Schedule of Local Sales and Use Taxes, allocating the local tax to localities where the Taxpayer's products are delivered. For a more detailed explanation of the law change, see Virginia Tax Bulletin 17-3 (5/3/17).

With respect to your request for prospective compliance, I would note that based on the specific information provided the collection and remittance requirement applicable to the Taxpayer became effective June 1, 2017.

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

The Code of Virginia sections and Tax Bulletin cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions regarding this ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/609.P