86-149 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Handling charges; Sales to a "sister" corporation

Topic

Collection of Tax

Taxability of Persons and Transactions

Date Issued

07-31-1986

July 31, 1986

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

Dear **************

This will reply to your letter of April 18, 1986, in which you submit an application for correction of sales and use tax assessed to *********** as the result of a recent audit.

FACTS

************* (Taxpayer) is a contractor engaged in furnishing and installing sprinkler systems. In addition, the taxpayer makes sales of tangible personal property to other consumers, including a sister corporation, *********** (Sister). The taxpayer and its sister are engaged in similar businesses and share the same offices, accounting department, and inventory system. The president of the taxpayer is also the president of the sister corporation.

A recent audit of the taxpayer produced an assessment for its failure to collect the sales tax from its sister based on the full selling price of items transferred to the sister from the taxpayer's inventory. The taxpayer contests the assessment of tax on handling charges added to the cost of items transferred to the sister.

DETERMINATION

Section 58.1-603 of the Code of Virginia provides for the imposition of the sales tax based on the "sales price" of each item or article of tangible personal property sold in the state. The term "sales price" is in turn defined in Virginia Code Section 58.1-602.17 as "the total amount for which tangible
personal property or services are sold, including any services that are a part of the sale...without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. Emphasis added

Under the statutory definition of "sales price", virtually any increment to the selling price of an article of tangible personal property is subject to the tax. Only those types of charges that are specifically set forth in Virginia Code Section 58.1-602.17 are excludable:

- (i) any cash discount allowed and taken, (ii) an amount separately charged for labor or services rendered in installing, applying, or remodeling or repairing property sold, (iii) finance charges, carrying charges, service charges or interest from credit extended on sales of tangible personal property under conditional sale contracts or other conditional contracts providing for deferred payments of the purchase price, (iv) transportation charges separately stated, (v) separately stated charges for alterations to apparel, clothing and garments, or (vi) charges for gift wrapping services performed by a nonprofit organization.

Thus, in this case, handling charges added by the taxpayer to the cost of goods purchased by its sister are part of the taxable sales price of the goods. The taxpayer alleges, however, that the handling charges are in fact inner company accounting adjustments resulting from a withdrawal of items from a joint inventory of goods maintained by the taxpayer and its sister. The taxpayer further alleges that there is no "sale" upon which to impose the tax on the handling charges. It must be noted, however, that the terms "retail sale" and "sale" are broadly defined under state law.

The term "retail sale" is defined in Virginia Code Section 58.1- 602.14 as meaning "a sale to any person for any purpose other than for resale...and shall include any such transaction as the Tax Commissioner upon investigation finds to be in lieu of a sale." Furthermore, the term "sale" is defined in Virginia Code Section 58.1-602.16 as meaning "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...for a consideration

Based upon the above definitions, the imposition of tax is contemplated in virtually any transaction where tangible personal property changes hands for a consideration, including "paper" transfers between two affiliated businesses. As the transactions here are not in fact inner company transfers, but transfers between two businesses, taxable sales of tangible personal property occur. Illustrating this is the fact that the sister corporation has not exercised the option of purchasing materials under its own name, but instead has chosen to withdraw goods from the inventory purchased and maintained by the taxpayer.

Therefore, based on the foregoing, the assessment issued to the taxpayer is correct and payable. I am willing, however, to revise the department's audit if the taxpayer will provide evidence that the notice of assessment was indeed not mailed until January 27, 1986. I am also willing to consider a reasonable offer in compromise of the assessment if the taxpayer can demonstrate that handling charges of the type at issue here were made to the sister corporation during periods covered by previous departmental audits, but were not included in those audits. Collection efforts will be withheld for a period of 45 days in order for the taxpayer to present such information.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner