Tax Type
Retail Sales and Use Tax
Description
Design drawings; True object of the purchase
Topic
Taxability of Persons and Transactions
Date Issued
10-17-1986
October 17, 1986
Re: §58.1-1821 Application/ Sales and Use Tax
Dear **********************
This will reply to your letter of April 18, 1986 seeking correction of an assessment issued in the above referenced case for the period August 1, 1980 to July 31, 1985.
FACTS
************** (taxpayer), a law firm, assists clients seeking to obtain patents. In this connection, taxpayer must often purchase design drawings to be submitted with their clients' patent applications. Pursuant to department audit, taxpayer was held subject to the use tax on its untaxed purchases of such design drawings from patent design draftsmen. Taxpayer contests the imposition of the tax on these purchases contending they represent purchases of professional services exempt of sales and use tax.
Alternatively, taxpayer contends that those design drawings of patents purchased for clients dealing in interstate and foreign commerce should be exempt of the tax as purchases made in interstate commerce.
DETERMINATION
§58.1-604 of the Virginia Code levies a tax upon the use or consumption of tangible personal property in this state computed on the cost price of such item(s).
In determining 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, §630-10-97.1 of the Retail Sales and Use Tax Regulations provides that, the "true object" of the transaction must be examined. According to the regulation, "[i]f 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 services provided, will be taxable." (emphasis supplied)
The true object of taxpayer's purchases from design draftsmen in the present case is their professional skill and ability in reducing to detailed, practical application an inventors concepts and ideas. Accordingly, taxpayer's purchases from design draftsmen in this case in connection with the filing of patent applications on behalf of clients, qualifies for exemption from the tax. Therefore, I find basis for correction of the audit assessment in this case to remove all of such purchases.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner