Tax Type
Retail Sales and Use Tax
Description
"True object" provision of operational and management services
Topic
Assessment
Date Issued
11-03-2004
November 3, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period October 1999 through June 2002. I apologize for the Department's delay in responding to your letter.
FACTS
The Taxpayer contracts with law firm clients to provide document management services. These services include the operation, management and maintenance of client copy centers, mailrooms and related services. The Taxpayer charges a monthly management fee for its services and a monthly reprographics (copy) fee based on the volume of documents produced each month. The Taxpayer also charges for overtime, equipment and materials, and miscellaneous services. Prior to the Department's audit, the Taxpayer collected the tax from its customers on the copies provided and remitted such tax to the Department.
As a result of the audit, the auditor concluded that the "true object" of the Taxpayer's contract is the provision of copies to its customers. As such, the auditor assessed the sales tax on the management fees, overtime and equipment charges as services in connection with the sale of tangible personal property in accordance with the definition of "sales price" in Va. Code § 58.1-602. In addition, the auditor assessed the tax on copies upon which the Taxpayer failed to collect the tax.
The Taxpayer disputes the tax and believes that the "true object" in this instance is the provision of operational and management services, and that the tax does not apply to its contract charges. To support its position, the Taxpayer cites the services regulation in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 and a number of Tax Commissioner rulings.
DETERMINATION
Virginia Code § 58.1-609.5 1 exempts from the sales and use tax "[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 provides that "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." In section D, the regulation goes on to apply the "true object" test 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 Taxpayer's contract sets out a broad range of services and property provided by the Taxpayer to its clients. Schedule B specifically addresses the services performed by the Taxpayer. Primarily, the Taxpayer is responsible for the operation and management of its client's copy center, which entails operating the equipment and managing staff in order to produce document copies. In addition, the Taxpayer provides mail services that include receiving, sorting and the delivery of the mail. Along with these primary responsibilities, the Taxpayer contracts to provide messenger/courier management and fax services. The Taxpayer maintains its clients' conference rooms and provides some light housekeeping services. Lastly, the Taxpayer inventories and purchases office supplies in addition to other miscellaneous services.
After reviewing the Taxpayer's contract, I find that the "true object" of the transaction is the acquisition of services, specifically the Taxpayer's expertise in the management of copy centers and other management services that may or may not be related to document reproduction. While the provision of copies (tangible personal property) is significant in this instance, it is the Taxpayer's ability to handle the copy center functions, as well as other professional functions, which is primarily sought by the client. Accordingly, the Taxpayer's contract charges (including the reprographics fee) to its clients are not subject to the sales tax. The assessment issued to the Taxpayer will be abated.
In accordance with Title 23 VAC 10-210-4040(E), as a service provider the Taxpayer is the taxable user and consumer of all tangible personal property purchased for use in providing its exempt services. The Taxpayer must pay the tax to its vendors at the time of purchase of tangible personal property. If a vendor fails to collect the tax, the Taxpayer must remit the use tax directly to the Department using Form ST-7.
The Code of Virginia sections, regulation and public document cited are available online in the Tax Policy Library section of the Department's web site located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/45615J
Rulings of the Tax Commissioner