Tax Type
Retail Sales and Use Tax
Description
Services; Overview; Separate contracts
Topic
Taxability of Persons and Transactions
Date Issued
05-25-2000
May 25, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period January 1996 through June 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of providing international satellite communication services and related equipment. In addition to a Service License Agreement, the Taxpayer offers a variety of service and equipment contracts. A Service License Agreement is common to all communication contracts between the Taxpayer and customers; however, the customer may also contract with the Taxpayer to provide additional services or equipment in conjunction with the Service License Agreement. The Taxpayer offers five additional contract options, some for the provision of a service and others for the provision of tangible personal property. The customer may enter all or any combination of the contracts with the Taxpayer.
Upon audit, the auditor held the Taxpayer as a service provider, with all contracts falling within the umbrella of the Service License Agreement. The auditor assessed tax on all tangible personal property for use in providing this service. The Taxpayer believes that each contract stands on its own, and the contracts that convey tangible personal property to the customer should be treated as sales contracts, purchases of which may be made tax exempt for resale.
DETERMINATION
Code of Virginia § 58.1-609.5(1) provides that the 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...."
In addition, Title 23 of the Virginia Administrative Code 10-210-4040 sets forth the "true object" test to determine whether a particular transaction involves the taxable sale of tangible personal property or the provision of as exempt service. This regulation provides that:
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 services provided, will be taxable.
In the case at issue, the one common element present in all transactions between the Taxpayer and its customers is the execution of a Service License Agreement in which the Taxpayer provides satellite telecommunication services to the customer, i.e., a franchise agreement. This contract is clearly the provision of a service and does not entail the provision of tangible personal property. At the option of the customer, the customer may contract with the Taxpayer to provide ground station and antenna equipment, software licensing agreements, intellectual property rights, or maintenance service agreements. The customer also has the option of obtaining all equipment and software necessary for utilizing the satellite equipment from outside sources, provided such equipment and software meets certain specification set forth in the Service License Agreement.
In determining the sales tax application in situations which involve two or more contracts or agreements, the department looks to the structure of the transactions. If there are two or more contracts which are separately negotiated and can stand alone, the department recognizes these as separate contracts and taxes them according to the nature of each contract. In situations where there is an existing contract with accompanying work orders, the department will look to the "true object" of the existing contract in order to determine the sales tax application to the entire transaction, i.e., the provision of a service or the provision of tangible personal property. This position is supported in Public Document (P.D.) 95-16 (1/27/95), P.D. 96-271 (10/7/96), and P.D. 97-67 (2/14/97), copies enclosed.
Based on the information furnished to this office by the Taxpayer, the contracts in question are separate, independent contracts. The contracts are negotiated separately, and there is no requirement to purchase tangible personal property or additional services from the Taxpayer after entering into the Service License Agreement. Each contract is a separate and distinct instrument.
Accordingly, l find that each contract should be analyzed separately under the true object test. For those contracts in which the true object is the procurement of tangible personal property, the resale exemption is available. Tangible personal property purchased under these contracts and resold to the Taxpayer's customers will be removed from the audit.
An auditor from the department's ***** District Office will contact the Taxpayer to make the appropriate revisions in accordance with the above determination. Once the revisions have been made, a revised assessment will be issued to the Taxpayer. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24434K
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period January 1996 through June 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of providing international satellite communication services and related equipment. In addition to a Service License Agreement, the Taxpayer offers a variety of service and equipment contracts. A Service License Agreement is common to all communication contracts between the Taxpayer and customers; however, the customer may also contract with the Taxpayer to provide additional services or equipment in conjunction with the Service License Agreement. The Taxpayer offers five additional contract options, some for the provision of a service and others for the provision of tangible personal property. The customer may enter all or any combination of the contracts with the Taxpayer.
Upon audit, the auditor held the Taxpayer as a service provider, with all contracts falling within the umbrella of the Service License Agreement. The auditor assessed tax on all tangible personal property for use in providing this service. The Taxpayer believes that each contract stands on its own, and the contracts that convey tangible personal property to the customer should be treated as sales contracts, purchases of which may be made tax exempt for resale.
DETERMINATION
Code of Virginia § 58.1-609.5(1) provides that the 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...."
In addition, Title 23 of the Virginia Administrative Code 10-210-4040 sets forth the "true object" test to determine whether a particular transaction involves the taxable sale of tangible personal property or the provision of as exempt service. This regulation provides that:
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 services provided, will be taxable.
In the case at issue, the one common element present in all transactions between the Taxpayer and its customers is the execution of a Service License Agreement in which the Taxpayer provides satellite telecommunication services to the customer, i.e., a franchise agreement. This contract is clearly the provision of a service and does not entail the provision of tangible personal property. At the option of the customer, the customer may contract with the Taxpayer to provide ground station and antenna equipment, software licensing agreements, intellectual property rights, or maintenance service agreements. The customer also has the option of obtaining all equipment and software necessary for utilizing the satellite equipment from outside sources, provided such equipment and software meets certain specification set forth in the Service License Agreement.
In determining the sales tax application in situations which involve two or more contracts or agreements, the department looks to the structure of the transactions. If there are two or more contracts which are separately negotiated and can stand alone, the department recognizes these as separate contracts and taxes them according to the nature of each contract. In situations where there is an existing contract with accompanying work orders, the department will look to the "true object" of the existing contract in order to determine the sales tax application to the entire transaction, i.e., the provision of a service or the provision of tangible personal property. This position is supported in Public Document (P.D.) 95-16 (1/27/95), P.D. 96-271 (10/7/96), and P.D. 97-67 (2/14/97), copies enclosed.
Based on the information furnished to this office by the Taxpayer, the contracts in question are separate, independent contracts. The contracts are negotiated separately, and there is no requirement to purchase tangible personal property or additional services from the Taxpayer after entering into the Service License Agreement. Each contract is a separate and distinct instrument.
Accordingly, l find that each contract should be analyzed separately under the true object test. For those contracts in which the true object is the procurement of tangible personal property, the resale exemption is available. Tangible personal property purchased under these contracts and resold to the Taxpayer's customers will be removed from the audit.
An auditor from the department's ***** District Office will contact the Taxpayer to make the appropriate revisions in accordance with the above determination. Once the revisions have been made, a revised assessment will be issued to the Taxpayer. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24434K
Rulings of the Tax Commissioner