Tax Type
Retail Sales and Use Tax
Description
Maintenance contract; Interior designer fees
Topic
Taxability of Persons and Transactions
Date Issued
04-19-1996
April 19, 1996
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear*************
This will reply to your letter of January 3, 1996 in which you protest the department's assessment of sales and use tax to******* (the "Taxpayer"), for the period June 1989 through May 1995.
FACTS
The Taxpayer is a personal service corporation which provides legal services. A recent audit of the Taxpayer produced an assessment in part for the Taxpayer's failure to accrue the tax on its purchase of a network maintenance agreement. The Taxpayer maintains that the agreement, which covers repairs as well as verbal and written support to operate the system, should not be taxed as the majority of the charge is related to service activities.
Additionally, the Taxpayer also contests the department's assessment of tax on design fees charged by an interior decorator, which the Taxpayer provides were separately stated on all invoices, and in conformance to the wording of the Virginia Regulations.
The Taxpayer requests a correction of the department's assessment to exclude the contested transactions.
DETERMINATION
Maintenance Contracts: The Taxpayer was held liable for maintenance contracts that provide for parts and labor. You request that the department exclude that portion of the maintenance contract related to the service activities.
The application of sales and use tax to maintenance contracts is set forth in Virginia Regulation (VR) 630-10-62.1, copy enclosed. Under this regulation, contracts which provide both repair or replacement parts and repair parts represent a sale of tangible personal property and thus are subject to the tax based upon their full selling price. The regulation further states that the tax will apply to the total charge for a maintenance contract regardless of the fact that the contract may separately charge for parts and labor. Accordingly, the maintenance contract was appropriately held taxable in the department's assessment.
It should be noted that effective January 1,1996, parts and labor maintenance contracts are subject to the tax on one-half the total charge for such contracts. See Code of Virginia § 58.1-609.5(9), copy enclosed.
Design Fees: VR 630-10-50 sets forth the application of the tax to charges by an interior decorator, and states in part the following:
-
- When a decorator makes a lump sum charge for services and furnishes tangible personal property, the tax applies to the total charge, unless the charge for services is billed separately from the tangible personal property. (Emphasis added).
As set forth in this regulation, the tax does not apply to the charges made by an interior decorator which are solely for design and/or consulting services. If the interior decorator goes beyond the rendition of services and sells tangible personal property, and makes a lump sum charge for the design or consulting services and for tangible personal property, such lump sum charge is taxable. The invoicing of these services must be separate in the billing function and not merely separate on the same invoice.
Additionally, in a previous ruling, P.D. 88-131 (6/13/88), copy enclosed, the department noted that a purchasing fee, which was a fee based on a percentage of the tangible personal property sold, was imposed only when the decorator sold tangible personal property to its clients. As a result, the department determined that the fee was a part of the sales price of the property and was properly included in the taxable sales price.
In the instant case a design fee rather than a purchasing fee is the point of issue. The design fee is not billed separately, but rather billed in connection with the sale of tangible personal property, and only when tangible personal property is sold.
VR 630-10-97.1 provides that, "The tax does apply to charges made for the following: (1) any services included in or in connection with the sale of tangible personal property..." Since such services are so closely related to the sale of tangible personal property and have not been billed separately as required by VR 630-10-50, I must conclude that the design fees were properly included in :he department's assessment. Additionally, I note that such design fees, from the same interior decorator, were held taxable in the department's previous audit. Accordingly, there is no basis to allow for an adjustment to the department's audit.
If you have any additional questions regarding this matter, please contact **** of the department's Office of Tax Policy at***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10763Q
Rulings of the Tax Commissioner