April 25, 2019
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 2011 through September 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a custom exhibit house, offering a full range of exhibit development and management services. The Taxpayer contests the assessment of tax on sales of graphics made to customers and on the purchase of a maintenance agreement. These issues are addressed below.
DETERMINATION
Sales
The auditor assessed tax on coordination labor charged on the invoices at issue because the services were sold in connection with the sale of graphics. With respect to invoice *****, the Taxpayer maintains that coordination labor is not related to the production of graphics. Rather, the coordination labor refers strictly to administrative tasks, like managing logistics, making phone calls, writing narratives and estimates. The Taxpayer states that with respect to this invoice, the customer contracted for the production of graphics and a banner. The banner was created and billed, including sales tax and production of the banner did not require the use of an artist. The order for the graphic, however, did require an artist’s creation time, but was cancelled. The Taxpayer did not bill for the graphic because it did not create it, but did bill for the creation time because the artist was used prior to the order being cancelled. Relying on Title 23 of the Virginia Administrative Code (VAC) 10-210-4040, the Taxpayer maintains that because the graphic was not produced, the service related to it was not subject to the tax.
With respect to invoice *****, the Taxpayer draws a distinction between graphics create time and graphics computer time. The Taxpayer states that create time is a service that produces tangible personal property, whereas computer time is used to manipulate files and does not produce tangible personal property and, therefore, is not subject to the tax.
Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for “Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made.”
Title 23 VAC 10-210-4040 A provides that:
Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.
Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the "true object" test is used to determine the taxability of these transactions.
Title 23 VAC 10-210-4040 B 1 further states that “Any services included in or in connection with the sale of tangible personal property are taxable.”
Title 23 VAC 10-210-4040 D provides in pertinent part that:
In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined.
In this instance, the charges listed on both invoices are for the sale of services and graphics. In accordance with Virginia Code § 58.1-609.5 1 and Title 23 VAC 10-210-4040, the true object of the transactions is the production of the graphics. Virginia Code § 58.1-603 imposes the sales tax on “the gross sales price of each item or article of tangible personal property when sold at retail or distributed in this Commonwealth.” Further, Virginia Code § 58.1-602 defines sales price to mean “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale….” Based on these authorities, the services provided in connection with the production of the graphics are part of the sales price and subject to the retail sales and use tax. The established and consistent policy of the Department has been to apply the tax to services rendered in connection with the production or provision of tangible personal property. Accordingly, the tax was properly assessed in the audit on the service charges at issue, and removal of such charges is not warranted.
This determination is supported by Public Document 01-18 (3/14/01). In this public document, the auditor assessed tax on the purchase of graphic artwork and copy for use in various publications the taxpayer provided to its members. The work included the concept, writing, graphic design, mechanical art, and other services related to the final product. The taxpayer believed that the purchase of the graphic artwork and copy was the provision of an exempt service. In accordance with Title 23 VAC 10-210-4040, the services at issue were deemed taxable by the Tax Commissioner because they were provided in connection with the graphic artwork and copy.
It is noted that the Taxpayer explains that the graphic ordered on invoice ***** was cancelled. With respect to both invoices, the Taxpayer provides an explanation for the coordination labor and the computer time charged to support that both are not related to tangible personal property and, therefore, are not taxable. While, the explanations appear reasonable, the Taxpayer has not provided convincing documentation to support and confirm these explanations. Without such documentation, the information provided is insufficient to find that the assessment as issued is incorrect.
Maintenance Agreement
The maintenance agreement was held taxable because the auditor determined that the maintenance agreement was for the monthly maintenance of a copier that included parts in the monthly charge. The Taxpayer contests the assessment of tax and maintains that the maintenance agreement is not subject to the tax because it is for the provision of services only.
Virginia Code § 58.1-609.5 9 states that:
Beginning January 1, 1996, maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only. Persons providing maintenance pursuant to such a contract may purchase repair or replacement parts under a resale certificate of exemption.
Title 23 VAC 10-210-910 B 3 provides that:
Maintenance contracts that provide for the furnishing of both repair or replacement parts and repair labor are a combination of taxable sales and nontaxable services. As it is impossible to determine in advance the percentages of labor and parts that will be provided under the contract, the contract will be deemed to be a contract for one-half labor and one-half parts, regardless of the percentages of labor and parts actually provided under the contract. Thus, one-half of the total charge for such a contract is subject to the tax. Persons providing maintenance pursuant to such contracts may purchase repair or replacement parts under a resale certificate of exemption, but are liable for the tax on all items purchased for their own personal use and consumption in performing repairs or maintenance.
Section 20.0(c) of the maintenance agreement at issue very clearly states that material and parts can be furnished under the agreement. Based on this language, I find that the maintenance agreement is for the provision of labor and tangible personal property as considered in the aforementioned authorities. Accordingly, the tax was properly assessed in the audit on one-half of the total charge related to the maintenance agreement.
This determination is supported by P.D. 08-43 (4/17/08) and P.D. 11-60 (4/15/11), in which maintenance agreements for the provision of labor and parts were found to be subject to the retail sales and use tax on one-half of the associated charge.
CONCLUSION
Based on this determination, the assessment is correct. Revised bills will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding bills are paid within 30 days of the date of the bill. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.
The Code of Virginia sections, regulations and public documents 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 determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/625P