Tax Type
Retail Sales and Use Tax
Description
Assessment of use tax on local marketing group be treated as a part of the sales price of tangible products.
Topic
Computation of Tax
Tangible Personal Property
Taxable Transactions
Date Issued
08-27-2013
August 27, 2013
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to the letter submitted by ***** on behalf of ***** (the "Taxpayer") requesting correction of the retail sales and use tax assessment issued as a result of an audit for the period January 2007 through June 2010. I apologize for the delay in responding to the Taxpayer's appeal.
FACTS
The Taxpayer is an out-of-state manufacturer of heating, ventilating and air conditioning systems for sale to contractors who install them as capital improvements to real property. The Taxpayer sells its systems via independent dealers. An audit resulted in the assessment of use tax on local marketing group ("LMG") fees charged by the Taxpayer to its independent dealers. The LMG fees are for advertising and dealer training costs incurred by the Taxpayer and charged to its dealers at the rate of 2% of the sales price of the product sold. While the Taxpayer charged and collected Virginia use tax on the sales price of the products, no sales or use tax was charged on the LMG fees.
The Taxpayer contends that the LMG fees are non-taxable because they are for services entirely separate and apart from the sales of its products. According to the Taxpayer, it enters into advertising service agreements with its dealers who have agreed to participate in an LMG pool. The Taxpayer maintains that such service agreements are separate and apart from any sales of tangible personal property. Contributions to the LMG pool are measured as a percentage of each dealer's total sales, up to a maximum LMG contribution of $10,000 annually. Once the maximum annual contribution is met, no further LMG fees are charged for the year. The Taxpayer further maintains that the LMG fee has no connection to the sale of tangible personal property because such fee is not related to any service provided in connection with the sale of tangible personal property and does not contribute to the procurement of the product.
The Taxpayer also makes available alternative payment arrangements in which the LMG fees are billed quarterly. In these instances, the LMG fees are not billed on any of the Taxpayer's invoices for products but are separately billed to its dealers based on a percentage of the gross sales occurring during the quarter. The Taxpayer indicates that these LMG contributions serve the same purpose and are for the same services as the LMG contributions when received via regular invoice billings for equipment purchases.
DETERMINATION
Virginia Code § 58.1-602 defines "sales price" to mean:
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- the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, 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. "Sales price" shall not include (i) any cash discount allowed and taken; (ii) finance charges, carrying charges, service charges or interest from credit extended on sales of tangible personal property under conditional sale contracts or other conditional contracts providing for deferred payments of the purchase price; (iii) separately stated local property taxes collected; (iv) that portion of the amount paid by the purchaser as a discretionary gratuity added to the price of a meal; or (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20% of the price of the meal. Where used articles are taken in trade, or in a series of trades as a credit or part payment on the sale of new or used articles, the tax levied by this chapter shall be paid on the net difference between the sales price of the new or used articles and the credit for the used articles. [Emphasis added.]
As stated above, the statutory definition of "sales price" includes any services that are a part of a sale. As noted in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(A), charges for services are generally exempt from the retail sales and use tax, but services provided in connection with sales of tangible personal property are generally taxable.
The Taxpayer cites the Opinion of the Attorney General 11-068 (12/16/11) to note that a connection resulting in a taxable service exists when the service is incidental to a transaction whose dominant purpose is procuring a product. The Taxpayer maintains, however, that a sufficient connection occurs only when a fee is charged for a service rendered to the actual tangible personal property transferred as part of the sale. For this reason, the Taxpayer asserts that the LMG fees at issue are not connected with the Taxpayer's sales of tangible personal property.
I respectfully disagree. Regardless that the LMG fees are used to pay for general dealer advertising and training expenses, I find that the LMG fees are inextricably linked to the sale of the Taxpayer's products. First, they are required fees because dealer participation in the LMG pool is mandatory. Such fees are added at the time of sale to all sales until the maximum per dealer annual LMG contribution is reached. Because LMG fees are required, the charge constitutes a prerequisite for purchasing the Taxpayer's products and becomes an integral part of the sale of products. Second, the LMG fees are computed based on a fixed percentage of the sales price of tangible personal property and thus become linked directly to the sales of products. Third, in reviewing the invoices presented, I note that a 1.00% discount available to dealers for making timely payments applies to the sales price of the product fees as well as to the LMG fees. Thus, a price reduction is achieved for the sale of the product and such reduction is directly linked to a price reduction for the LMG fees. Fourth, the LMG fees are collected by the Taxpayer to pay for costs associated with dealer training and educational costs regarding the Taxpayer's products. Such educational and training costs directly impact the sale of the Taxpayer's products at the dealer level and facilitate the training of salesmen and technicians who sell and repair the Taxpayer's products. The LMG fees are also collected by the Taxpayer to recoup advertising costs that facilitate and encourage sales of the Taxpayer's products. These advertising and training expenses certainly contribute to and benefit the sale of the Taxpayer's products. Fifth, the LMG fees are similar to a fee for overhead and/or profit added to the sales price of goods. In Public Document 00-49 (4/10/00), the Tax Commissioner determined that the "sales price includes any amount charged as a markup for overhead expenses, other costs and profit in connection with the sale of tangible personal property." Based on the foregoing, the contested LMG fees are not separate from the sales transactions involving the Taxpayer's products but become an ancillary part of the sale of tangible personal property.
In regard to quarterly billings of LMG fees, the facts presented indicate that such quarterly fees are billed based on gross sales occurring during the quarter but are not billed on any invoice for the sale of tangible personal property. Notwithstanding, because such quarterly billings are inextricably linked to sales of tangible personal property, they also become an ancillary part of the sale of tangible personal property.
The Taxpayer maintains that the LMG fees are not connected to the sales of its products because the LMG contributions are contracted for separately from the individual sales of its products. While I recognize the existence of LMG contracts that set out the terms of the LMG fees, I must also recognize that such contracts are not totally exclusive of the sale of the Taxpayer's products. For instance, clause B of the Contributions section on page two of the contract provided states that "LMG contributions will appear on the product invoices as a separate line item." Clause A of such contract states that “[a]ll product will be charged the fixed rate of 2% up to a maximum per dealer contribution of $10,000 annually." [Emphasis added.] In effect, these contract clauses demonstrate a definite connection to the sale of the Taxpayer's products.
The Taxpayer also maintains that invoicing separately stated LMG fees on a per sales transaction basis allows for smaller amounts of LMG fees to be paid over time by dealers, as opposed to paying on a monthly, quarterly or annual basis. Notwithstanding, there is nothing in the statute that prevents the tax from applying to such fees when charged in connection with sales of tangible personal property.
In addition, the degree of connection of a service or expense to a sale of tangible personal property is not defined in the statute or regulation. In such instances, a common meaning of the phrase "part of the sale" would likely require some definitive connection to the sale to tie expenses or services to the sale of tangible personal property. As previously noted, I have pointed out several connections that tie LMG fees to the products sold by the Taxpayer.
In regard to the additional information furnished, I find that the cases cited from the Texas and Rhode Island courts are not applicable to the issue in question because they focus on separate and distinct transactions.1 The Texas case involves the sale of equipment and engineering services in which the engineering services are independently desired and independently provided. The Rhode Island case involves similar facts and treats two elements of a mixed transaction involving a consequential service and consequential tangible personal property as readily separable into two distinct and identifiable elements for taxation as separate transactions. Neither court found the true object test to be applicable to such transactions. In the Taxpayer's case, it is clear that the LMG fees are directly linked to the sale of the Taxpayer's products, and provide for services that are directly related to the marketability of the Taxpayer's products.
Furthermore, in contrast to the Texas and Rhode Island court rulings noted above, the Department has established policy that applies the true object test to transactions in which the services and the product are both critical elements to the transaction. For instance, subsection D of Title 23 VAC 10-210-4040 provides for how the tax should apply in a situation where both the services rendered and the tangible personal property provided are critical elements of the transaction. Generally, the degree of customization, uniqueness or specific services provided in connection with the product are considered in determining the appropriate tax status. In this case, the LMG services appear to consist of standard services that enable dealers to sell, install and repair the Taxpayer's products. While the dealers desire these services, I find that the primary goal is to acquire the Taxpayer's products. Without the products, the services furnished by the Taxpayer would be mostly useless to the dealers. Accordingly, the true object of the transactions is for the sale of products.
Based on all of the foregoing, it is my determination that the contested LMG fees are not independent charges and must be treated as a part of the sales of the Taxpayer's tangible products. As such, I find that the contested LMG fees are taxable.
CONCLUSION
Based on the foregoing, the contested assessment is correct. Because the contested assessment is paid in full, no further action is required.
The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this matter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5264525977.R
1.Comptroller v. San Antonio SMSA Limited Partnership, et al., 11 S.W.3d 484 (2000) and New England Telephone and Telegraph Co. v. Clark, 624 A.2d 298 (1993).
Rulings of the Tax Commissioner