Rulings of the Tax Commissioner

January 18, 2023

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

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period October 2015 through May 2019. I apologize for the delay in responding to your letter. 

FACTS

The Taxpayer rents party inflatables, tables, games, and other entertainment items to customers in Virginia. As a result of the Department’s audit, the Taxpayer was assessed tax on transactions where inflatables were rented and no tax was collected on the charge. The Taxpayer contends these items should not be taxable as they are rentals with an operator or attendant and many rentals were made to churches.  

DETERMINATION

Equipment Rental

Virginia Code § 58.1-603 imposes the sales tax on the lease or rental of tangible personal property in the Commonwealth. The tax is computed on the gross proceeds derived from such lease or rental.
 
Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for “[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made....” Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 addresses the application of the tax to service transactions and states, "Charges for services generally are exempt from the sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." The regulation describes the "true object" test used in determining whether a transaction involving both the rendition of services and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The “true object” test states:
 
If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
 
In Public Document (P.D.) 04-194 (10/29/2004) and P.D. 06-87 (9/19/2006), the dealers rented inflatable amusement games such as moonwalks, slides, and obstacle courses. The dealers contended operators were provided and, thus, contested the assessment of tax on the rental of these amusement games. The person provided with the rental of the amusement games was deemed an attendant monitoring the operation and use of the games. For this reason, the true object of the transaction was determined to be the rental of tangible personal property as the attendant did not utilize specific skills required to maintain safety and control over the games.

Church Exemption

Virginia Code § 58.1-609.10 16, provides, in pertinent part, that the retail sales and use tax does not apply to “[t]angible personal property purchased by nonprofit churches that are exempt from taxation under § 501(c)(3) of the Internal Revenue Code, or whose real property is exempt from local taxation pursuant to the provisions of § 58.1-3606.” 

Virginia Code § 58.1-623 A provides: 

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

Title 23 VAC 10-210-280 states: 

Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.

In order for the exemption related to sales made to a church to apply, the sale must meet one of the criteria listed in Virginia Code § 58.1-609.10 16. Additionally, the church must provide to the Taxpayer a valid exemption certificate or a Department issued nonprofit exemption letter as provided in Virginia Code § 58.1-609.11 in order for the sale to be made exempt of the tax. The Taxpayer did not have exemption certificates on file at the time of audit, but provided several Form ST-13A exemption certificates to the auditor after the fact. 

Based on the information provided, the Taxpayer's rentals of games and other property assessed in the audit did not meet the requirements of the exemption certificates. For example, the exemption certificate made available to certain nonprofit churches (Form ST-13A) clearly specifies the type of purchases that may be made exempt of the tax. The exact wording of the certificate outlines exempt tangible personal property, as follows:

Tangible personal property, including prepared meals, catering, and other services related to the provision of food; purchased by churches organized not for profit and which are exempt from taxation under IRC § 501(c)(3) or whose real property is exempt from local taxation pursuant to the provisions of Va. Code § 58.1-3606, for use: 

(a) in religious worship services by a congregation or church membership while meeting together in a single location; 

(b) in the libraries, offices, meeting or counseling rooms, or other rooms in the public church buildings used in carrying out the work of the church and its related ministries, including kindergarten, elementary, and secondary schools. The exemption for such churches shall also include baptistries, bulletins, programs, newspapers and newsletters which do not contain paid advertising and are used in carrying out the work of the church and gifts, including food, for distribution outside the public church building; and 

(c) in (i) caring for or maintaining property owned by the church including, but not limited to, mowing equipment, and (ii) building materials installed by the church and for which the church does not contract with a person or entity to have installed, in the public church buildings used in carrying out the work of the church and its related ministries, including, but not limited to worship services; administrative rooms; and kindergarten, elementary, and secondary schools.

2. Food, including prepared meals, catering, and other services related to the provision of food; disposable serving items; cleaning supplies; and teaching materials used in the operation of camps or conference centers by a church as defined in Item 1 above, or an organization composed of such churches and which are used in carrying out the work of the church or churches.

In addition, the certificate states at the bottom, “NOTE: This exemption certificate does not provide exemption for any tangible personal property purchased by a church other than that specified above.” The Taxpayer’s rentals of games to churches did not fall within the scope of exemption specified on the certificate. This finding is consistent with P.D. 06-87, referenced in the previous section, where a dealer rented similar items to churches with attendants. 

CONCLUSION

Based on this determination, the assessment is upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of this letter. If the assessment is not paid within the 60-day period collection action may result.

The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions about this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****, or via email at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/3348.C