Document Number
10-120
Tax Type
Retail Sales and Use Tax
Description
Occasional sales exemption applies to tangible personal property a result of reorganization.
Topic
Property Subject to Tax
Records/Returns/Payments
Tangible Personal Property
Taxable Transactions
Date Issued
07-01-2010

July 1, 2010



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

Dear *****:

This is in response to your letter and additional supporting documentation submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period October 2005 through August 2008. It is noted that the assessment has been paid in full. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer states that prior to 2007, it operated two different businesses. One portion of its business operated as an Internet/computer application provider and a telephone/cabling installation contractor. The other portion of its business was an Internet based electronic medical records (EMR) system. On January 1, 2007, the Taxpayer completed a tax-free reorganization pursuant to Internal Revenue Code (I.R.C.) § 368(a)(1)(C). Under the reorganization all of the assets, including all of the equipment, related to the EMR system were distributed to a subsidiary corporation. After the distribution to the subsidiary, the stock in the subsidiary was distributed to the Taxpayer's shareholders. The basis of the assets distributed to the subsidiary was the same as the basis of the assets in the Taxpayer. Relying on Public Document (P.D.) 97-453 (11/14/97), the Taxpayer contends that the transfer of the EMR assets and equipment represents an occasional sale that is not subject to the retail sales and use tax.

DETERMINATION


Virginia Code § 58.1-609.10 states, the retail sales and use tax does not apply to "[a]n occasional sale as defined in § 58.1-602." Pursuant to Va. Code § 58.1-602, an occasional sale is defined as:
    • A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration.

Title 23 of the Virginia Administrative Code 10-210-1080 B further defines the term "occasional sale" as:
    • 1. A sale by a person who is engaged in sales on three or fewer separate occasions within one calendar year, except that sales at fairs, flea markets, circuses and carnivals and sales made by peddlers and street vendors are not occasional sales; or
    • 2. A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration. The words "not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration" mean that a registered dealer is not entitled to an occasional sale exemption solely by virtue of the fact that the article sold may be of a different class from the merchandise he/she regularly sells; or
    • 3. The sale or exchange of all or substantially all the assets of any business; or
    • 4. The reorganization or liquidation of any business.

In P.D. 97-453 (11/14/97), the taxpayer and the subsidiary together operated a chain of retail stores in Virginia. The subsidiary owned the tangible personal property used in the stores' business and the taxpayer's employees operated the stores. The taxpayer proposed a corporate reorganization to locate all aspects of operating the stores to the taxpayer. To this end, the two parties would conduct a series of transactions. First, the subsidiary would form a new corporate subsidiary ("new company") and contribute to the new company all of the assets used by the subsidiary in the stores in exchange for all of the stock of new company. The taxpayer believed that this transaction would qualify as a tax-free reorganization under I.R.C. § 351. The subsidiary would then distribute all of the stock of the new company to the taxpayer as a dividend. Finally the taxpayer would liquidate the new company and receive all of the assets in the new company. The first transaction between the subsidiary and new company was ruled a tax-exempt reorganization of assets for stock in the commencing organization. The Department had previously determined that such a transaction is a qualifying reorganization for purposes of the occasional sale. The second transaction, a stock dividend, was ruled not taxable because it did not involve the transfer of tangible personal property. Finally, the liquidation of the new company was ruled a qualifying liquidation under the occasional sale exemption as it represented the "sale or exchange or all or substantially all the assets" of the new company.

In addition, in P.D. 04-214 (12/8/04), the taxpayer purchased stock from its Parent company as part of a recapitalization agreement. The agreement transferred a portion of the Parent's consulting services to the taxpayer. The taxpayer treated the transaction as an asset sale for federal tax purposes under I.R.C. § 338(h)(10). The taxpayer also purchased items of tangible personal property from the Parent as part of the transition services agreement. The transition services agreement was entered into within a month of when the recapitalization agreement was executed. The taxpayer was assessed tax on these purchase transactions. The taxpayer maintained that the purchases were properly made exempt of the tax because the stock transaction qualified as an occasional sale. It was determined that the fact that the taxpayer treated the transaction, for federal tax purposes, as an asset sale under I.R.C. § 338(h)(10) had no bearing on the status of the transaction for Virginia retail sales and use tax purposes. The documentation provided with the taxpayer's letter indicated that the tangible personal property purchased from the Parent as part of the transition services agreement qualified as an exempt occasional sale because it represented the reorganization of a business. Accordingly, the transactions at issue were deemed exempt from the retail sales and use tax.

In this instance, the Taxpayer treated the transactions at issue as a reorganization pursuant to I.R.C. § 368(a)(1)(C). However, the treatment of these transactions under the Internal Revenue Code has no bearing on the status of these transactions for Virginia retail sales and use tax purposes. The transfer of all of the assets and equipment, related to the EMR system, for stock in the subsidiary company represents a reorganization of the Taxpayer's business. The occasional sales exemption applies to the tangible personal property at issue as a result of the reorganization.

Accordingly, the tangible personal property at issue (labeled Spinoff Equipment on the Non-Contested Sales of Assets exceptions list) will be removed from the audit and the tax assessed with respect to these items will be abated. The audit will be returned to the audit staff for revision based on this determination. Upon completion of the revision, the Taxpayer will receive a refund of the tax and interest paid with refund interest accrued to date.

The Code of Virginia sections, regulation and public documents 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/1-3551112461.P


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46