Virginia Sales Tax Sourcing May Depend on Which Party Arranges Shipping

At a glance

• The main takeaway: A recent Virginia ruling concludes that when a purchaser contracts with a common carrier to pick up goods at the seller’s place of business in Virginia, Virginia sales tax applies.   
• Assess the impact: The ruling is contrary to the general sourcing rule under the Streamlined Sales and Use Tax Agreement adopted by many states and illustrates the importance of examining each state’s sales tax sourcing rules.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help businesses evaluate if and how this ruling may impact their sales tax liability.

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The Full Story

The Virginia Department of Taxation recently addressed in Ruling 24-100 how to source a sale for sales tax purposes when an out-of-state purchaser arranges for a third-party common carrier to pick up the product at the seller’s Virginia location. This scenario is the opposite of a typical retail sale, in which a seller will generally arrange for the shipping of their own products. Those familiar with sales and use tax rules would presume that Virginia sales tax would likely not apply regardless of which party arranges for the shipping because the applicable state sales tax is typically determined based on the “delivery” location or the location where the purchaser first takes possession of the product. However, in the view of the Department, the purchaser arranging for the common carrier to deliver the product instead of the seller warrants a different outcome in terms of whether the sale is subject to Virginia sales tax.    

A closer look at the ruling

The Department’s ruling was issued in response to a Virginia-based manufacturer’s request for guidance on the sales tax treatment of two different scenarios. This article focuses on the second scenario:

Are the dealer’s sales of products whereby the customers pay a third-party common carrier to pick up tangible personal property at the dealer’s Virginia warehouse subject to Virginia sales tax given title to the property is transferred in Virginia?

Of note in this scenario is that the common carrier is taking possession of the goods pursuant to a contract between the purchaser and the carrier. 

As is the case with most state sales taxes, Virginia provides an exemption from tax for retail sales involving the “[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth.”[1] Virginia’s regulations further provide that tax does not apply “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.”[2] The regulation goes on to provide a handful of examples of nontaxable tractions, all of which involve either delivery by the seller or delivery by a common carrier or contract carrier that is hired by the seller. 

In the context of these rules, the Department concluded that Virginia sales tax does apply because “the common carrier has taken possession of goods pursuant to a contract between the carrier and the purchaser . . . [and] the title to the property is transferred to the purchaser at the Virginia location.”

Making sense of the ruling

Based on the ruling, when the purchaser hires the common carrier, the Department views the purchaser as taking constructive possession and title of the product when the common carrier picks up the product at the manufacturer’s Virginia location. In contrast, when a seller arranges for a common carrier to deliver a product to a purchaser outside of Virginia, the Commonwealth’s sales tax does not apply, presumably because possession of the product (regardless of when title passes) is deemed to pass at the purchaser’s out-of-state location.

The bottom line

It is worth noting that Virginia’s position for purchaser-arranged shipping appears to be at odds with many states that adopted the Streamlined Sales and Use Tax Agreement (SSUTA). Under SSUTA’s sourcing rules, sales tax applies where the purchaser “receives” the product; however, the rules define “receives” to exclude “possession by a shipping company on behalf of the purchaser.”[3]  Thus, under the SSUTA rules, it does not matter who arranges shipping, and sales tax will be sourced where the actual purchaser receives the product. Interestingly, Virginia’s rule appears to be more administrable since the seller does not need to know where the purchaser-arranged carrier is delivering the product. Under the SSUTA rule, the seller still needs to find out where the purchaser-arranged carrier is delivering the product so it knows where to source the sales tax.

Aprio’s SALT teamhas experience analyzing the sales tax rules, including sourcing provisions, in all states.  Our goal is to ensure that your business complies with its sales and use tax obligations and does not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Va. Code § 58.1-609.10.4.

[2] 23 VAC 10-210-780.

[3] See Streamlined Sales and Use Tax Agreement (as amended through October 8, 2024), Sections 310 and 311. Virginia is not a member of SSUTA.