Tax Type
Retail Sales and Use Tax
Description
Interstate transactions
Topic
Taxability of Persons and Transactions
Date Issued
12-05-1997
December 5, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in reply to your letters in which you seek correction of sales and use tax assessed to****** (the "Taxpayer"), for the period November 1993 through September 1996.
FACTS
The Taxpayer is a multi-level marketing firm that sells nutritional and health care products through a network of distributors located in Virginia, the United States, and worldwide. The Taxpayer collects and remits the sales tax on behalf of its distributors in Virginia. The tax is collected on the suggested retail value of the products sold to the distributors. The pdoducts are resold by the distributors to their customers.
During the department's audit, the auditor discovered that the Taxpayer failed to collect the tax on combined shipping and handling charges in connection with the sale of products to the distributors. In addition, the auditor assessed tax on sales of products to distributors located outside the United States that were shipped via a freight forwarder located at a Virginia airport. The Taxpayer disputes the tax assessed in each instance.
DETERMINATION
Shipping and Handling Charges
The Taxpayer contends the tax was collected on the suggested retail value of the products as required under an agreement with the department. The Taxpayer believes the shipping and handling charges are not subject to the tax because they represent an expense to the distributors which is not passed to their customers.
Code of Virglinia § 58.1-602 defines sales price, in part, as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale”. Handling charges are considered a service in connection with a sale and are taxable.
Title 23 of the Virginia Administrative Code (VAC) 10-210-6000 (formerly Virginia Regulation 630-10-107) exempts from the tax separately stated transportation and delivery charges. However, the department has consistently held shipping charges, when combined with handling charges into a single charge, to be taxable. Therefore, the tax was properly assessed in this instance. I am enclosing prior rulings of the department that discuss the application of the tax to combined shipping and handling charges in detail.
The Taxpayer's reliance upon the department's letter of February 1, 1985 is misplaced. The letter served as the department's acknowledgment of receipt of the Taxpayer's request for registration on a consolidated basis. The letter was not intended to address department policy with respect to the application of the tax to the sales transactions between the Taxpayer and its Virginia distributors. I am enclosing the department's standard agreement with multi-level marketing firms for the collection of tax on behalf of thelir distributors.
Sales Shipped Via Virginia
This issue deals with the Taxpayer's sale of products to distributors located outside the United States. According to your discussion with a member of my Tax Policy staff, the product orders were prepaid and the distributors instructed the Taxpayer to ship the products by common carrier to the distributors' agent, a freight forwarder, located at a Virginia airport. The product shipment was boarded for air delivery to a destination point outside the United States. You indicate title to the products transferred at the Taxpayer's distribution point outside Virginia and no use or distribution of the Products occurred in Virginia.
Code of Virginia § 58.1-609.10(4) provides an exemption from the sales and use tax for goods delivered to a factor or export agent and destined for foreign export. Such goods are deemed for use and consumption outside Virginia when delivered by the seller to the factor or export agent in the seller's vehicle, by common carrier, by licensed contract or independent trucker hired by the seller or by U.S. mail.
The products were delivered by common carrier to the Virginia airport for foreign export. A review of the airway bill indicates the freight forwarder as the agent for the distributors located outside the United States. Based on the information provided, the delivery of the products to the freight forwarder at the Virginia airport for foreign export qualify for the exernption provided in Code of Virginia § 58.1-609.10(4). The transactions will be removed from the audit.
You indicate in your letter the possibility of challenging the audit sample. You, however, do not present information to dispute the sample period. Based on a review of the audit, l do not find a basis to invalidate the audit sample periods.
The Taxpayer will receive an adjusted bill including updated interest. The Taxpayer should review and sign the enclosed agreement regarding the collection of tax on behalf of its distributors in Virginia. The agreement should be returned to ***in the Office of Tax Policy. If you have questions concerning the decision in this letter or the agreement, you may contact her at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12281J
Rulings of the Tax Commissioner