03-67 | Virginia Tax

Tax Type

Intangible Personal Property Tax

Description

LZM, Inc. v. Virginia Department of Taxation Case number CL01-0552

Topic

Court Case

Date Issued

08-21-2003

TWENTY-SEVENTH JUDICIAL CIRCUIT
OF VIRGINIA

ROBERT M.D. Turk, Judge Taylor Mead Albright, Esq.
MONTGOMERY COUNTY COURTHOUSE
P.O. Box 6156
CHRISTIANSBURG, VIRGINIA 24068-6156
TELEPHONE: (540) 394-2016
FACSIMILE: (540) 394-2015

August 21, 2003

Taylor Mead Albright, Esq.
ALBRIGHT & BONGARD
P.O. Box 30
Blacksburg, VA 24063

Paul M. Thompson, Esq.
Senior Assistant Attorney General
Office of the Attorney General
900 East Main Street
Richmond, VA 23219

Re: LZM, INC. v. VIRGINIA DEPARTMENT OF TAXATION
CASE NO. CL01-0552

Dear Counselors:

This case was initially brought before the court for argument on cross motions for summary judgment in February, 2003. After reviewing the briefs, stipulation of facts, and other documents submitted for the court's review, I had some additional questions that I wanted answered prior to arriving at an opinion. On July 2, 2003 additional evidence was taken, namely testimony of Mr. Larry Martin on behalf of LZM, Inc. The court has reviewed and considered the briefs submitted by the parties, the statements of fact, the exhibits, and the transcript of Mr. Martin's testimony in arriving at my opinion in this case. Both parties have agreed that there are no other genuine issues of fact for the court to hear, therefore, summary judgment is appropriate at this time.

In the case at bar, the plaintiff, LZM, Inc., was assessed a sales and use tax by the defendant, Commonwealth of Virginia, for the leasing and pumping service of portable toilets. The plaintiff is in the business of leasing portable toilets and offers a pumping service to a company with a portable toilet lease. Although the plaintiff does pump other types of containers on an infrequent basis, the plaintiff primarily offers pumping services in conjunction with the lease of its portable toilets. The plaintiff has heretofore paid the taxes in question under protest.

The plaintiff now seeks to recover the taxes paid as well as the interest and cost of the assessed taxes. The defendant has filed its motion for summary judgment, requesting the court to find that the Department of Taxation's decision was the correct decision in taxing the pumping service on the portable toilets.

Pursuant to Regulation 23 VAC10-210-840, the Commonwealth may collect taxes on the gross proceeds from the lease of tangible personal property. Gross proceeds are defined to include "any service charges in connection with the lease of property". Regulation 23 VAC 10--210-4040(A) further elaborates on the taxation of services by stating, "generally, charges for services are exempt from retail sales and use tax. However, services provided in conjunction with sales of tangible personal property are taxable." In § 58-441.2(b) of the Code of Virginia, the term "sales" has been defined to include the traditional meaning of sale, as well as lease or rental. Additionally, the regulations provide the "true object" test to determine whether a service is sold in connection with the lease of personal property. 23 VAC10-210-4040(D). The "true object" test provides:

- 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.

The Virginia Supreme Court applied the "true object" test in WTAR Radio-TV Corp. v. Commonwealth of Virginia, et al, 217 Va. 877 (1977). In WTAR, the court held that the manner in which the invoice was computed did not affect whether a service charged in connection with a sale was taxable. In WTAR, the court dealt with the issue of whether the service involved in creating a commercial should be taxed as part of the final product, which was the film of the commercial. In its billing statements, the plaintiff charged separately for the service and the film. The court observed that there is service involved with the creation of every commercial. The court applied the "true object", test and ruled that the product sought was the actual film. Therefore, the service involved in making the film was taxable.

Similarly, the determination in the present case depends upon whether the customer is primarily seeing the portable toilet or the pumping of the portable toilet. Like the plaintiff in WTAR, LZM does use a separate contract and billing statement for the pumping service of its leased toilets. However, as in WTAR the separation of billing is not dispositive of whether the service is separate from the object sought. In the present case, the plaintiffs representative, Mr. Martin, testified that in June, 1999, 445 toilets were leased. Of the 445, only 115 toilets were leased without the pumping service. Most of the 115 toilets leased without service were not serviced by another company, but were simply picked up by the plaintiff at the end of the agreed time period. There was no testimony presented that indicated why the 115 toilets leased did not include the pumping service. Mr. Martin indicated that sometimes if they are only being leased for one day or for one event, then pumping will not be necessary.

The plaintiff subsequently pumped those 115 toilets in-house. Thus, pumping is a service that is inextricably tied to the use of portable toilets and must be done eventually for the use of the portable toilet in the future. Likewise, in WTAR, for a commercial film to exist, there must be services performed to create the film. Since all portable toilets must be pumped eventually, whether the toilet is located at the customer's site or in-house, the service of pumping is required to make the lease of portable toilets possible.

The plaintiff argues that the pumping service is separate from the portable toilet lease because the plaintiff also provides pumping services for portable toilets owned by other companies. Although the plaintiff pumps toilets owned by other companies, it does not provide this pumping service on a competitive basis. Rather, the company agrees to pump another rental company's toilets more so out of convenience rather than out of any competitive-type basis. Moreover, there is no price differential for pumping a portable toilet owned by another company and pumping the plaintiffs own portable toilets. Also, the pumping service is not offered as a separate service to individuals. It is only offered to a lessee of the portable toilets. Again, the fact that the companies are not competing to provide the pumping service to the general public shows that pumping is part of the portable toilet lease and not a separate service sought by the customers.

Further, it was testified that the pumping service agreement is negotiated at the same time the lease agreement is negotiated. They are not "separate" transactions but are all part of one transaction.

Finally, the plaintiff charges by the number of portable toilets leased and not by the amount of waste pumped from the toilets. The portable toilets are leased with no service, regular service, or extra service. The pumped waste is incidental to the rental of the toilet itself. If the pumping service was primarily sought, then the price would be based on the requirements of the pumping itself and not the portable toilet. Therefore, under the "true object" test, the court finds that the customers primarily sought the rental of the portable toilets, and the pumping services provided were sought only in connection with proper operation of the portable toilet rental.

Based upon the stipulations and evidence proffered, the court would grant summary judgment in favor of the defendant, Virginia Department of Taxation. The court would further request that Mr. Thompson prepare the appropriate order pursuant to this court's written opinion.

I would ask that this opinion be incorporated in the order by reference.

With kindest regards, I am

- - - - Sincerely,

Robert M.D. Tuck

RMDT/j

Rulings of the Tax Commissioner