Document Number
11-6
Tax Type
Retail Sales and Use Tax
Description
Manufacturer of concrete structural materials; Tangible personal property delivered out of state.
Topic
Exemptions
Manufacturing
Tangible Personal Property
Date Issued
01-14-2011

January 14, 2011





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 assessments issued to ***** (the Taxpayer) as a result of an audit for the period August 2005 through September 2008. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer is a manufacturer of concrete structural materials. An audit resulted in the assessment of various sales and purchases of tangible personal property.

The Taxpayer disputes the sales tax assessed on sales of tangible personal property delivered out of state. According to the Department's auditor, all sales from the Taxpayer's plant during the audit period were "FOB our plant in *****, Va." (i.e., free on board or F.O.B. origin), except for one Louisiana transaction.

The Taxpayer claims that the F.O.B. origin transactions held in the four-month sales sample constitute exempt sales in interstate commerce. According to the Taxpayer, the carrier in these contested transactions is registered as an interstate carrier and delivered the Taxpayer's product from the Taxpayer's Virginia plant to its North Carolina customer. The Taxpayer has been audited previously by the Department and claims that no sales tax has been assessed on similar sales in the past.

DETERMINATION


In addition to the F.O.B. delivery terms, clause 7 of the -taxpayer's document titled "Terms of Sale" sets out the following:
    • Unless otherwise stated, for products delivered FOB, our plant *****, Virginia, the Seller will furnish all labor and equipment at no additional cost, required to load, block and tie down the product to the conveyance. The Buyer will furnish all materials, suitably fabricated, required for blocking and tying down. If Seller provides any blocking or tie down materials, then Seller will invoice Buyer for the value of such materials; plus, the labor charge to cut, fabricate and place such material. The supervision of the loading, blocking and tie down arrangements, as well as the suitability of the conveyance, is the sole responsibility of the Buyer and the Buyer will assure itself that these arrangements and this conveyance are suitable in every respect before the conveyance is removed from Seller's property. All liability of the Seller for loading, blocking, tying down and securing terminates on the removal of the conveyance from the Seller's property or on the approval of the loading, blocking, tying down and securing by the Buyer, or his Agent, whichever occurs first and Buyer will indemnify and hold harmless Seller from any and all claims which may arise from such liability.

It is my understanding from the auditor that the F.O.B. origin terms are used to protect the Taxpayer from liability issues starting with product loading and all subsequent events. The auditor's point is supported by clause 10 of the Terms of Sale, which states, "Buyer indemnifies Seller against all claim, suits or demands from any third party to any alleged accident, damage or loss while unloading, transporting, storing or rehandling this product subsequent to departure from the plant." I also note that all of the contested invoices include the following phrase: MANUFACTURED PRODUCT AWAITNG (sic) YOUR SHIPPING INSTRUCTIONS. Such phrase is indicative of the buyer's responsibility for shipment of the Taxpayer's product.

Pursuant to Va. Code § 58.1-602, a "sale" is defined as "any transfer of title or possession . . . in any manner or by any means whatsoever, of tangible personal property . . . for a consideration . . . ." However, Va. Code § 58.1-609.10 4 (formerly, Va. Code § 58.1-­608 A 10 d) 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.

This statute is interpreted by Title 23 of the Virginia Administrative Code (VAC) 10-­210-780 (former Virginia Regulation 630-10-51), which states 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 in Virginia. [Emphasis added.]

This regulation provides four examples of transactions that constitute exempt sales in interstate or foreign commerce. The fourth example concerns resale situations and is not applicable to the Taxpayer's situation. The first three examples concern the following:
  • ● Delivery outside Virginia in the seller's vehicle,
    ● Delivery outside Virginia by an independent trucker or contract carrier hired by the seller, and
    ● Delivery by the seller to a common carrier or to the U.S. Post Office for delivery outside the state.

The first two examples are clearly not applicable to the Taxpayer's situation because the Taxpayer performed no delivery with its own vehicles and did not hire the carrier. In regard to the third example, I would note that the Department regarded a common carrier of interstate shipments as one authorized to operate under a certificate of convenience and necessity issued by the Interstate Commerce Commission (ICC).1

Such authorization no longer exists because of the deregulation of the trucking industry and the subsequent elimination of the ICC. While the ICC common carrier authorization is nonexistent, no new statutory or regulatory term has been introduced to define the term "common carrier" for purposes of Title 23 VAC 10-210-780. As such, we must resort to the common definition of the term. In Black's Law Dictionary, 5th Ed., page 249 (1979), the term "common carrier" is defined as follows:
    • Any carrier required by law to convey passengers or freight without refusal if the approved fare or charge is paid in contrast to private or contract carrier. One who holds himself out to the public as engaged in business of transportation of persons or property from place to place for compensation, and who offers services to the public generally. Tilson v. Ford Motor Co., D.C.Mich., 130 F. Supp. 676, 678. Such is to be distinguished from a contract or private carrier.

In contrast, Black's Law Dictionary 5th Ed., page 294 (1979), defines the term "contract carrier" as follows:
    • A carrier which furnishes transportation service to meet the special needs of shippers who cannot be adequately served by common carriers. Samardick of Grand Island-Hastings, Inc. v. B. D. C. Corp., 183 Neb. 229, 159 N.W.2d 310, 315. A transportation company that carries, for pay, the goods of certain customers only as contrasted to a common carrier that carries the goods of the public in general.

In the instant case, the Taxpayer indicates that the carrier is registered as an interstate carrier with the Federal Motor Carrier Safety Administration (FMCSA) and delivered the Taxpayer's product from the Taxpayer's Virginia plant to a location in North Carolina. While I do not doubt these facts, there is no evidence that, such carrier operated in the capacity of a common carrier under the common definitions shown above. Rather, based on the facts presented, it appears that the carrier operated as a contract carrier for the contested deliveries. Furthermore, registration as an interstate carrier with the FMCSA is not analogous to the ICC authorization to operate as a common carrier in interstate commerce. See Public Document (P.D.) 05-31 (3/11/05).

In P.D. 93-86 (3/29/93), the seller made sales to a purchaser who hired motor carriers to ship the goods out-of-state. The Tax Commissioner ruled that the interstate commerce regulation provides that all deliveries by common carrier, regardless of who contracts with the carrier, are exempt sales in interstate commerce. However, the Tax Commissioner further ruled that the carriers, although licensed by the ICC as common carriers, were hired on a contract basis to specifically pick up the goods on behalf of the out-of-state purchaser. As such, the contested sales failed to qualify as sales delivered in interstate commerce. Similarly, in the instant case, the purchaser appears to have contracted with the carrier to specifically transport the goods sold by the Taxpayer. Using the rationale of P.D. 93-86, the contested sales were not delivered by the Taxpayer into interstate commerce.

Even if the carrier in question were acting as a common carrier, which it does not appear to have done, the key issue to be resolved is whether a taxable event occurred in Virginia. Pursuant to Title 23 VAC 10-210-780, no sale occurs in Virginia if the seller transfers neither title nor possession in the Commonwealth but rather places the goods in interstate commerce for delivery outside the Commonwealth. If the goods are not placed in interstate commerce before title or possession passes to the purchaser in Virginia (e.g., if the purchaser takes possession of the goods in Virginia and subsequently delivers them for use outside of the state in his own vehicle), the subsequent delivery of the goods outside of the state will not render the transaction nontaxable in Virginia. See the Virginia Attorney General Opinion 01121994.

In 1993, at the request of the Virginia General Assembly, the Department performed an in-depth study of several exemptions, including the interstate commerce exemption. See the enclosed pages 59 - 63 of the Virginia Sales and Use Tax Expenditure Study (December 1993, Volume 1, No. 5). In regard to the interstate commerce exemption, the scope section on page 61 of such study specifically states that "[title] or possession does not pass until the property reaches its ultimate destination." It further states that "[because] no title or possession is transferred in Virginia, no sale takes place in Virginia."

The Department has long recognized that the interstate and foreign commerce exemption was enacted to avoid the possible constitutional problems involved in taxing interstate and international sales. See page 59 of the above cited study. In addition, the courts have long recognized that if a taxable event occurs in Virginia, subsequent delivery of property outside of Virginia does not exempt it from the tax. See the reference to Commonwealth v. Pounding Mill Ouarry, 215 Va. 647, 652 (1975) on page 60 of the above cited study. In Pounding Mill Quarry, the taxpayer sold and delivered untaxed stone to West Virginia contractors. The contractors took delivery of the stone in their trucks at the taxpayer's quarry in Virginia and immediately transported it to West Virginia where the stone was used by the contractors in their operations. The Virginia Supreme Court held:
    • The taxpayer argues that it should be exempt from the sales tax because the property was not used or consumed in Virginia but was immediately transported to West Virginia where it was used or consumed. The Act, however, exempts only "[delivery] of tangible personal property outside this State for use or consumption outside this State." Code § 58-441.6(r). Since both sale and delivery occurred in this state, Virginia could have validly imposed a sales tax upon such a sale even though the parties knew that the purchaser intended to immediately transport the property to another state and use it there. Internat'I Harvester Co. v. Dept. of Treasury, 322 U.S. 340, 345, 64 S. Ct. 1019, 88 L. Ed. 1313 (1944). [Emphasis added.]

Thus, the interstate commerce exemption is not applicable to the sales transactions at issue in Pounding Mill Quarry because the property was delivered to the purchaser in Virginia. While the Taxpayer's circumstances are not exactly the same as in the Pounding Mill Quarry case, both cases involve the issue of determining where delivery occurs in order to determine the tax consequences. Based on Pounding Mill Quarry, I must conclude that if a seller's obligation for the sale and delivery of property is accomplished in Virginia, then the transaction is taxable in Virginia.

In the Taxpayer's case, the transactions at issue specify F.O.B. terms to require delivery of the goods to the buyer at the Taxpayer's Virginia plant. Such F.O.B. terms have been addressed by numerous courts. In Virginia for example, the general rule for passing of title on F.O.B. railcar shipments is that title passes absolutely to the buyer and the property becomes the buyer's risk as soon as the goods are placed on the carrier for shipment. 2 See Rountree v. Graham, 144 Va. 145, 131 S.E. 193 (1926). In North Carolina, the general rule is that under a contract for sale providing for a sale F.O.B. the point of shipment, the carrier is the agent of the purchaser, and title passes upon delivery to the carrier. Marshville Rendering Corp. v. Gas Heat Engineering Corp., 10 N.C.App. 39, 177 S.E.2d 907 (1970) citing the Supreme Court of North Carolina's decision in Peed v. Burleson's, 244 N.C. 437, 94 S.E.2d 351 (1956). Also see the Supreme Court of North Carolina's decision in Hunter v. Randolph, 128 N.C. 91, 92, 38 S.E. 288 (1901). In Maryland, the general rule for a sale F.O.B. is that the point of shipment is the place of delivery, and at such place title passes from the seller at the moment of delivery to the carrier, and the goods are thereafter at the buyer's risk, but this, rule is dependent on the intention of the parties. See International Co. v. Sun-Maid Raisin Growers, 146 Md. 608, 127 A. 393 (1925). Similar general rules are found in Ohio, New York and other states.

The United States District Court has similarly ruled that the title to goods in an F.O.B. contract passes to the buyer when the goods are actually delivered on board a carrier. See Bay Tobacco, LLC v. Bell Quality Tobacco Products, 261 F.Supp.2d 483 (2003), MEMC Elec. Materials, Inc. v. Mitsubishi Materials Silicon Corp., 420 F.3d 1369, 1374 (2005), and Soto v. Meadow Mills, Inc., 2009 WL 1873785 (E.D.Va.). Furthermore, when a shipment is by F.O.B. Origin, title to the goods pass upon delivery by the seller to a carrier for shipment to the buyer. See Factory Mut. Iris. Co. v. Liberty Mut. Ins. Co., 518 F.Supp.2d 803, 813 (2007) referring to Williston on Contracts, § 52:11 (4th ed.) and Va. Code § 8.1-401(2)(a).

Although the Taxpayer's Terms of Sale appear clear as to the place of delivery, I would note that Va. Code § 8.2-401 of the Uniform Commercial Code - Sales (UCCS) sets out a number of rules with respect to the passing of title for all commercial goods transactions in the Commonwealth when the place of delivery is not expressly stated in the terms of the sale. Subsection (2) of Va. Code § 8.2-401 specifically mandates the following:
    • Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place; and in particular and despite any reservation of a security interest by the bill of lading:
    • (a) if the contract requires or authorizes the seller to send the goods to the buyer but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment; but
      (b) if the contract requires delivery at destination, title passes on tender there. [Emphasis added.]

Based on the F.O.B. terms in this case, the Taxpayer appears to complete its performance of the physical delivery of goods to the buyer when it has loaded, blocked and tied down the goods to the conveyance at the Taxpayer's Virginia plant, and the buyer or the buyer's agent has accepted such load or otherwise permitted the conveyance to proceed off the Taxpayer's premises. Pursuant to the UCCS transfer of title provisions cited above, I must conclude that title to the goods at issue transferred to the purchaser at the Taxpayer's Virginia plant. For this reason and the fact that the situs of sale is in Virginia, the contested goods are taxable in Virginia.

This determination is made in light of the ruling made in P.D. 93-53 (3/5/93). In that ruling, the Taxpayer asked whether a tax exemption applied in spite of the title provisions in its contract if the purchased property was delivered by the seller FOB common carrier contractor's plant for delivery outside Virginia. The Tax Commissioner held that, "the exemption applies to the Taxpayer so long as the seller delivers the goods to the Taxpayer by common carrier or one of the other methods listed . . . provided physical or constructive possession does not occur in Virginia." In the instant case, the evidence presented does not provide conclusive proof that the buyer hired a common carrier or that such carrier acted in the capacity of a common carrier for the delivery of the Taxpayer's goods. Moreover, even if the carrier could be deemed a common carrier, the buyer has an employee or agent in Virginia to approve the loading of the goods for shipment. When the loading is completed and approved, actual possession of the goods transfers to the Taxpayer in Virginia. Thus, a taxable event occurs in Virginia before the goods are transported outside Virginia.

Of final importance, the Taxpayer's appeal includes information on interstate and multistate sales and use tax issues. Most all of that information concerns nexus issues and is not relevant to the issues in the instant case. Several cases cited determine that carriers that cross state lines are engaged in interstate commerce or that the property was or was not used in interstate commerce. I do not dispute the fact in the instant case that the carrier hired by the purchaser crossed state lines and is considered an interstate carrier. Rather, the issue to focus upon in the instant case is whether a taxable event occurred in Virginia before the goods were shipped. In this regard, while some cases cited by the Taxpayer address interstate commerce issues, none of them are directly on point with the F.O.B. shipment and passage of title issues addressed above. Furthermore, while North Carolina exempts sales when the vendor delivers goods to a common carrier for transportation and delivery to the purchaser at a point: outside the state, section 42-1 of its Tax Bulletin (12/1/08) does not address the passage of title consequences for sales with F.O.B delivery terms.

CONCLUSION


Based on this determination, the assessment is correct. The contested assessment is paid in full. No refund is authorized as a result of this determination.

The Code of Virginia sections, regulations 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,


                • Craig M. Burns
                  Tax Commissioner



AR/1-4347898209.R
1 Pursuant to the repealed regulation on common carriers of property by motor vehicle (Former Title 23 VAC 10-210-370 A.)
2.This general rule would also appear applicable to F.O.B. origin terms requiring a motor vehicle carrier

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46