Tax Type
Retail Sales and Use Tax
Description
Convenience Checks: True Object Test
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
08-01-2001
August 1 , 2001
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 your client, ***** (the "Taxpayer"), for the period April 1996 through March 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a Florida corporation that provides Convenience Check programs to credit unions throughout the United States, including Virginia. The Convenience Check program consists of checks written by credit card holders which are debited against their credit card. The program provides credit unions with two options: (1) the Taxpayer will sell checks to credit unions and also serve as a clearinghouse processor of checks and related services, or (2) the Taxpayer provides clearinghouse processing and related services without the sale of checks to the credit unions. In the second scenario, the credit unions will either print their own checks or purchase checks from a third party.
Upon audit, the auditor determined that the "true object" of the transaction between the Taxpayer and credit unions was the provision of check processing and related services, and the sale of checks to credit unions was inconsequential. The auditor assessed the Taxpayer tax on the purchase of checks based on the position that the checks are tangible personal property used by the Taxpayer in the provision of its check processing services provided to credit unions.
The Taxpayer believes it is in fact providing a tax-exempt service and, in some cases, providing both a tax-exempt service and selling tangible personal property, i.e., convenience checks. The Taxpayer maintains the convenience checks are purchased for resale and requests that the use tax associated with the convenience checks, along with the associated penalty and interest, be abated.
DETERMINATION
When determining whether a transaction involving both the sale of tangible personal property and the provision of a service represents a sale of tangible personal property or an exempt service, the "true object" test is used. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) states 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, including the charge for any services provided, is taxable."
In the present case, I have reviewed the Service Agreement, along with Exhibit A (an explanation of the services provided), the Taxpayer enters into with its customers, i.e., credit unions. A review of the Service Agreement reveals there is no reference to a separate sale of convenience checks to the credit unions. Furthermore, Exhibit A does not mention the sale of convenience checks to credit unions. Based on these contracts, it is my determination that the true object of the transaction between the Taxpayer and the credit unions is the provision of a service.
In addition, it has been the longstanding policy of the department that banks and credit unions are dealers with respect to the sale of checks, checkbooks and other tangible personal property to their customers. These entities (or the commercial check printer acting on behalf of the bank or credit union) must collect the sales tax on such sales. Traditionally, banks and credit unions provide convenience checks free of charge to credit card holders as a convenience item for obtaining cash advances against the card holder's credit limit. Therefore, convenience checks cannot be considered resale items by credit unions to their customers. Accordingly, convenience checks are inconsequential to the service transaction between the Taxpayer and the credit unions.
Based on all of the above, I find that the auditor correctly assessed the use tax on convenience checks and related tangible personal property consumed by the Taxpayer in providing tax-exempt check processing services to the credit unions. The Taxpayer should remit its payment for the remaining balance of the assessment, totaling ***** within 45 days from the date of this letter. The Taxpayer's check should be sent to ***** Office of Policy Development, P. O. Box 1880, Richmond, Virginia 23218-1880. If payment is not received within the allotted time, interest will accrue from the date of assessment until the date of payment, and collection action will be initiated.
If you should have any questions regarding this matter, please contact ***** at *****.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26426K
Rulings of the Tax Commissioner