12-70 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Use tax assessed on charges for permits and site surveys; Pass-through fees

Topic

Tangible Personal Property

Taxable Transactions

Date Issued

05-03-2012

May 3, 2012

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

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period February 2008 through December 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an out-of-state dealer that fabricates signs and is registered to collect the Virginia use tax. An audit resulted in the assessment of use tax on untaxed charges in connection with sales of signs to Virginia customers.

The Taxpayer disagrees with the use tax assessed on charges for permits and site surveys. The Taxpayer contends that these charges should not be considered part of the sale. The Taxpayer indicates that the contested charges would not be treated as part of the sale of tangible personal property provided the service is separately stated and the seller allows the buyer to perform the services itself or to hire someone else to perform the services. On the other hand, if the buyer is not given the option to perform the services or hire someone else to perform the services, then the service is treated as part of the sale and is subject to taxation. In this regard, the Taxpayer indicates that it does not require the buyer of its signs to obtain the permit and survey services from it. The Taxpayer does sell signs without providing these services. As such, the permit and survey services are not a required service but are provided as a convenience to its customers, if requested.

I understand that the permit fee is a pass-through fee that the locality charges for a permit to erect a sign. I understand that the survey or site survey fee is a site assessment, i.e., an inspection of the site by the Taxpayer where the sign is to be placed and an evaluation of whether the sign locations are suitable or need modification.

The Taxpayer also contends that the permit and survey charges correlate more with the installation of the signs than with the purchasing of the signs. The Taxpayer requests the abatement of the contested charges and the refund of the tax and interest paid.

DETERMINATION

Manufactured Signs - Law Changes

Due to a legislative change, the application of the tax to manufactured signs changed effective July 1, 2005. This law change amended the definition of tangible personal property in Va. Code § 58.1-602 to include manufactured signs. As explained in the Department's fiscal impact statement for House Bill 2774 of the 2005 session of the Virginia General Assembly that codified this law change, the intent of the law change was to treat a transaction for the sale and installation of a manufactured sign as a sale of tangible personal property regardless of the fact that the sign may be attached to or become part of real property. As a result, a sign manufacturer would be required to register for the collection and remittance of the retail sales tax based on the sales price of the manufactured signs sold at retail. Separately stated installation charges would be exempt from the tax pursuant to Va. Code § 58.1-609.5 2.

Taxable Services

Virginia Code § 58.1-603 imposes the sales tax upon the gross sales price of tangible personal property sold at retail or distributed in Virginia. Virginia Code § 58.1-604 imposes the use tax on the cost price of tangible personal property used or consumed in Virginia. Pursuant to Va. Code § 58.1-602, cost price is computed in the same manner as sales price without any deduction for the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever. Pursuant to Va. Code § 58.1-602, sales price means "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever." [Emphasis added.] Unless specifically exempt by law, any services provided in connection with the sale of tangible personal property are subject to taxation. See Public Document (P.D.) 98-71 (4/20/98).

For any part of the sales price to be exempted from the tax, the service or expense must be expressly stated in an exemption or exclusion statute. The only exclusions and exemptions from the sales price of a taxable article of tangible personal property are those listed in Va. Code § 58.1-602 under the definition of sales price (e.g., cash discounts allowed and taken, certain finance charges related to credit extended on conditional sale contracts, etc.) and in Va. Code § 58.1-609.5 which lists various exemptions, such as separately stated transportation charges and separately charged installation or repair labor charges. Based on a review of the exemption statutes and the exclusions from sales price and cost price, there is no specific exemption or exclusion in the law that allows the charge for permits or site surveys to be exempted or excluded from tax when such charges are part of the sale of tangible personal property.

Furthermore, when a transaction is for both the sale of tangible personal property and services, the true object of the transaction must be examined to determine whether the transaction is for the taxable retail sale of tangible personal property or exempt services. As explained in Title 23 Virginia Administrative Code (VAC) 10-210-4040 D, a transaction will constitute an exempt service if the object of the transaction is to secure a service and the tangible personal property that is transferred to the customer is not critical to the transaction. On the other hand, if the object of the transaction is to secure the property, then the entire charge, including the charge for any services provided, is taxable.

In 2011 Op. Va. Att'y Gen. 068, the Attorney General of Virginia held that "when the true object of a transaction is the acquisition of a good and the service provided is incidental to that purchase, there is a connection between the sale and service that allows the imposition of the sales tax on the service." The OAG Opinion supported the ruling in P.D. 94-241 (8/10/94), in which the Tax Commissioner found that the fee for disposing of used tires is taxable when the disposal service is provided in conjunction with the sale of new tires. On the other hand, the provision of a tire disposal service without the sale of tangible personal property would be exempt.

The Tax Commissioner has made other similar rulings. For instance, employee travel and accommodation charges made in connection with the retail sale of tangible personal property are subject to taxation. See P.D. 01-78 (6/14/01) and P.D. 96-88 (5/14/96). Carrier maintenance fees do not qualify for the transportation exemption because such fees are not directly related to the actual transportation of property. See P.D. 08-177 (9/18/08). Charges for configuration and integration are not considered part of the installation process and are subject to taxation. See P.D. 02-96 (6/25/02). Other amounts charged for services in connection with sales of tangible personal property such as personnel training, on-site testing, and installation assistance are subject to the tax. See P.D. 87-217 (10/2/87). Engineering services used to design a security system are deemed furnished as part of the sale of tangible personal property and subject to tax. See P.D. 98-26 (3/13/98). Federal manufacturer's excise tax (except for the federal diesel fuel excise tax) is subject to taxation when billed in connection with the sale of tangible personal property. See P.D. 88-318 (12/7/88). Lastly, in P.D. 10-190 (8/26/10), the Tax Commissioner found that a tank inspection/permit fee related to the rental of a tank was taxable. As demonstrated above, the established and consistent policy of the Department has been to apply the tax to services and expenses in connection with the sale of tangible personal property. Accordingly, I find that the permit fees and site survey fees in question are subject to taxation.

Optional Service Charges

The statutes do not allow an exception to be made for optional services that are furnished in connection with the sale of tangible personal property. Provided the buyer has opted to purchase services that are furnished in connection with the sale of tangible personal property, such services are deemed sold in connection with such property and are subject to taxation in the same manner as the tangible items transferred, unless the service charge is specifically exempted from the tax. For example, various optional fees (optional trade chart package fee, optional island book package fee, optional back office fee, and optional historical data updates fee) charged in connection with the sale of prewritten software transferred via a tangible medium are taxable. See P.D. 04-38 (7/28/04).

The permit fees and site survey services at issue are furnished in order to complete the sale of the tangible personal property. If the buyer opts to perform such services himself, then the Taxpayer has not furnished such services and sells its signs without such fees and services. Whereas, if the buyer opts for the Taxpayer to obtain the permit and furnish site survey services, the true object of the transaction has not changed, i.e., the transaction is still for the sale of tangible personal property. The permit and survey services provided are incidental to the sale of tangible personal property and are considered part of the sale because they complete the sale.

While other states may have a policy to exclude optional services from sales taxation, the Department is not required to follow the decisions of other states in interpreting the tax laws of Virginia. Rather, as shown above, it has been the long-standing policy of the Department to tax all services and expenses (whether optional or required) provided in connection with the retail sale of tangible personal property, unless a statutory exemption or exclusion applies. In P.D. 10-43 (4/23/10), the Tax Commissioner ruled that optional services provided in connection with the sale of tangible personal property are subject to taxation.

Pass-Through Charges

While the pass-through permit fee does not constitute the provision of a service per se, it does constitute an "other expense" that may not be deducted from the taxable sales price. As set out in P.D. 09-55 (5/1/09), any pass-through charges for services, even if separately stated, are considered part of the sales price for which the tangible personal property is sold and is taxable.

Correlation to Installation Charges

The Taxpayer contends that the permit and survey charges correlate more with the installation of the signs than with the purchasing of the signs. I disagree. The permits and site surveys do not constitute labor for the actual installation of the manufactured signs. Rather, the permit and survey activities are activities conducted prior to the actual installation of the sign.

The Virginia courts have long held that exemptions from the retail sales and use tax must be strictly construed against the one seeking the exemption. See Commonwealth v. Community Motor Bus Company, 214 Va. 155, 198 S.E. 2d 619 (1973). For example, the Department has ruled that assembly does not constitute installation. Rather, installation is limited to setting the tangible personal property in place or adjusting the property for use. See P. D. 97-90 (2/20/97) and 98-12 (1/20/98). Also, installation is "labor rendered after the product is complete in order to install it for the customer." See P.D. 86-186 (9/18/96). Thus, exempt installation charges do not include activities preparatory to the installation process. Likewise, the permit and survey charges do not fall within the exemption for separately stated installation charges as contemplated in Va. Code § 58.1-609.5 2.

Other Fees (Not Contested)

I understand that the Taxpayer charges a permit acquisition fee for the time spent obtaining the permit and a code check fee for investigating zoning ordinances to ensure that the sign installations comply with the current law. While these fees are assessed in the audit but are not contested, it is important to point out that they are charged in connection with the sale of manufactured signs and also constitute taxable services in connection with the sale of tangible personal property.

CONCLUSION

Based on this determination, the assessment is correct. Because the assessment is paid, no further action is required.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-4809904911.R

Rulings of the Tax Commissioner