Tax Type
Retail Sales and Use Tax
Description
Classification of Coffee Equipment
Topic
Basis of Tax
Date Issued
06-21-2001
June 21, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in 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 February 1997 through July 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an importer and distributor of specialty coffee machines, coffee products, and supplies to restaurants, hotels, and offices. Customers contract with the Taxpayer to purchase or rent its coffee machines and purchase coffee products and supplies for use with the machines. In addition, a potential customer has the option of free use of a coffee machine prior to purchase or rental. The Taxpayer services all coffee machines that it sells, rents, or provides for free use.
At issue is the Taxpayer's provision of coffee machines free of charge to potential customers for use on a trial basis. The department's auditor determined the coffee machines to be loaned equipment and assessed the use tax on the cost of the machines. The Taxpayer disagrees with the tax and contends it purchases the machines for resale, as they are ultimately sold or rented to customers.
DETERMINATION
The Taxpayer purchases the coffee machines, coffee products, and supplies and holds them in a resale inventory. Under its "free use" program, the Taxpayer withdraws the coffee machines from inventory and provides them to potential customers. Customers are required to purchase a minimum amount of coffee product and supplies for use with the machines during the trial period. According to the Taxpayer, the machines are provided on a trial basis to encourage potential customers to make a purchase or enter into a rental contract. Machines returned to the Taxpayer are placed in inventory for sale or rental to other customers.
Code of Virginia § 58.1-623(C) provides that if a taxpayer who gives a certificate under this section makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale, distribution, or lease in the regular course of business, such use is deemed a taxable sale by the taxpayer as of the time the property or service is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale.
Historically, the department has held coffee service companies liable for the sales and use tax on the purchase of coffee machines. In such instances, the coffee machines are not purchased for resale or lease, but instead are purchased and "loaned" free of charge to customers for use in conjunction with the sale of coffee products. Public Document (P.D.) 93-84 (3/26/93).
That is not the case here. The coffee machines are provided for demonstration purposes and are intended for resale at the time they are withdrawn from inventory. The machines are either sold or rented to the potential customer or returned to the Taxpayer's inventory for resale or rental to other customers. Therefore, the machines do not lose their exempt status as resale inventory. Based on the cited statute, I find that the Taxpayer does not make a taxable use of the coffee machines provided under its "free use" program, and is not subject to the use tax on the cost of such machines.
This determination is consistent with a prior ruling of the department, P.D. 99-62 (4/12/99). The ruling addressed computer products provided to customers on a trial basis for a specified period of time. The Tax Commissioner found that no taxable use of the products was made, as the products were either sold to the trial customer or returned to the taxpayer for resale to other customers.
In accordance with my decision, the assessment will be abated. For your information, I have enclosed copies of the cited statute and department rulings. If you have questions, you may contact ***** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/29519J
P.D. 01-77
COMMONWEALTH - VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner