March 27, 2024
Re: § 58.1-1821 Appeal: Retail Sales and Use Tax
Dear *****:
This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the taxable period August 2013 through July 2016. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, an information technology company in Virginia, entered into a contract titled “Intellectual Property Purchase Agreement,” whereby it agreed to purchase various assets related to an “Exam Room Consultation Device (ERCD).” The purchased assets included four prototypes of the ERCD, as well as any associated intellectual property rights, software programmed to operate the equipment, and goodwill. The Taxpayer did not remit or accrue Virginia retail sales or use tax on the transaction.
Under second generation audit, the Department issued an assessment of retail sales and use tax on the total purchase price for the transaction. The Taxpayer timely filed an application for correction, contending that the transaction is not taxable because any tangible personal property transferred was inconsequential pursuant to the true object test.
DETERMINATION
Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax does not apply to “professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made….” Under Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A:
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.
Further, Title 23 VAC 10-210-4040 D provides:
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. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
The Department has held that royalties paid only for an intangible right without any transfer of tangible personal property are not subject to retail sales and use tax. However, when royalties are paid for intellectual property rights and tangible personal property, the transaction becomes taxable. See Public Document (P.D.) 00-76 (5/15/2000), P.D. 03-37 (4/15/2003), and P.D. 03-74 (10/27/2003). While the Taxpayer’s transaction does not involve royalties, the concept that a transaction for medical equipment requiring intellectual property, software, and tangible personal property in order to operate is inextricably linked and, thus, taxable remains applicable.
The Taxpayer cites P.D. 04-199 (11/3/2004) and P.D. 13-23 (2/20/2013) in support of its position that transactions are not taxable. However, the services in those cases, marketing consulting services and document management services respectively, were independent of the tangible personal property included in the transactions. The transactions were not taxable because the tangible personal property was not critical to the service transactions.
After reviewing the terms of the Taxpayer’s contract, I find that the true object of the transaction was the acquisition of the ERCDs. Because the tangible personal property, intangible rights, and software are all inextricably connected to the ERCD, the tangible personal property cannot be considered inconsequential.
Accordingly, the transaction is taxable and the assessment must be upheld. An updated bill with accrued interest to date will be issued shortly. The Taxpayer should pay the amount due within 30 days of the date on the bill to avoid the accrual of additional interest or possible collection action.
The Code of Virginia sections, regulation, and public documents cited are available online at www.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 *****, or via email at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2083-C