Rulings of the Tax Commissioner

October 3, 2024

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 August 2017 through December 2020. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a provider of portable toilet rentals and services, was audited for the period at issue and an assessment was issued. The Taxpayer filed an application for correction, contending that the services connected to its rentals of tangible personal property should not be subject to tax. In addition, it claims some of the listed exceptions were for sales made to locations outside of Virginia or to tax exempt government entities. The Taxpayer has also provided some invoices for untaxed purchases listed in the audit for which it asserts tax was paid. Lastly, the Taxpayer requests the abatement of penalties because the Department’s policy with regard to the services is unclear.

DETERMINATION

Services and Rentals of Portable Toilets

The Taxpayer argues the service charge is not the sale of tangible personal property and, therefore, exempt from the retail sales and use tax. Virginia Code § 58.1-603 imposes the sales tax, in part, on “the gross proceeds derived from the lease or rental of tangible personal property . . ..” Virginia Code § 58.1-602 defines "[g]ross proceeds" as “the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section . . ..” This same statute goes onto to define “sales price” as it relates to Virginia’s sales and use tax and provides, in part:

“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, 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.

As provided above, the term sales price comprises the total amount, including any services that are part of the sale, for which tangible personal property is sold. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 sets out the Department’s policy with respect to the retail sales tax application to services and Subsection A provides “[c]harges 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 Title 23 VAC 10-210-4040 D, the “true object” test is used to determine the taxability of these transactions.

It has been the longstanding policy of the Department to treat the lease or rental of portable toilets as a taxable transaction. See Public Document (P.D.) 91-275 (10/28/1991), P.D. 11-118 (6/23/2011), and P.D. 13-40 (3/20/2013). The Department’s position has also been upheld by the Virginia Supreme Court in LZM Inc. v. Department, 296 Va. 105 (2005). 

The ”true object“ of a portable toilet transaction is the provision of tangible personal property. The waste removal and other services provided in a portable toilet transaction are incidental to the provision of the portable toilets. Thus, the auditor correctly included the untaxed service charges as exceptions in the audit.

Government Sales

The Taxpayer also claims that it made sales to tax exempt customers. Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Regarding sales to government entities, Title 23 VAC 10-210-690 states “[s]ales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable.” The Taxpayer has provided no official purchase orders from any government entity, nor any documentation substantiating that payment for sales to the government entities were from public funds. 

Interstate Sales

In its application for correction, the Taxpayer claims that certain exceptions included in the audit should be removed for sales made to customers outside of Virginia. Virginia Code § 58.1-609.10 4 provides an exemption from the retail sales and use tax for the “[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth.”

The Taxpayer provided invoices and documentation related to these exceptions with its application for correction. The submission of documentation shows delivery and service addresses outside of the state of Virginia. Because this documentation was not provided during the audit, it will be forwarded to the audit staff for review. 

Untaxed Purchases

In its application for correction, the Taxpayer claims that certain exceptions included in the audit should be removed for purchases in which tax has already been paid. The Taxpayer provided invoices and documentation related to these exceptions with its application for correction. Because this documentation was not provided during the audit, it will be forwarded to the audit staff for review. 

Penalty

Title 23 VAC 10-210-2032 B 1 provides for the mandatory application of penalty to audit deficiencies based on the percentage of compliance determined by computing the dealer’s compliance ratio. Under Title 23 VAC 10-210-2032 B 4 penalty will generally be applied unless a dealer’s compliance ratios under a second generation audit meet or exceed 85% for sales tax and 60% for use tax, as computed by the auditor or under the alternative method. 

In this second-generation audit, the Taxpayer’s sales tax compliance ratio as computed in the audit is 9% and its use tax compliance ratio is 46%. Accordingly, the compliance penalty was properly assessed in the audit.

Further, Virginia Code § 58.1-105 grants the Tax Commissioner the authority to accept an offer in compromise and to settle claims of disputed or doubtful liability, or doubtful collectibility and to waive penalty for reasonable cause. Contrary to the Taxpayer’s assertion that the Department’s policy regarding portable toilets is not clear, the policy, as cited above, has been established and consistently applied for well over 30 years. Accordingly, an abatement of the compliance penalty is not warranted. 

CONCLUSION

Based on this determination, the charges for services made in connection with the Taxpayer’s rental of portable toilets are subject to tax. As a result, this portion of the assessment is upheld.

The documentation submitted with regard to the interstate sales and untaxed purchases will be returned to the auditor for review. In addition, the Taxpayer will be granted an opportunity to provide purchase orders or other official government documents to show it made exempt sales to local county governments. The auditor may also request additional information and will contact the Taxpayer to set up a mutually agreed upon time to review the records. If the review of records results in a revision of the tax liability, the compliance ratios will also be recomputed and the assessment of penalty adjusted accordingly.

After the review of documentation is complete, the auditor will issue an updated bill, with interest accrued to date. The Taxpayer should remit payment of the balance due within 60 days of the date on the updated bill to avoid the accrual of additional interest or possible collection action.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) ***** or *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR4200.Z