Tax Type
Retail Sales and Use Tax
Description
Nonprofit Exemptions
Topic
Basis of Tax
Property Subject to Tax
Date Issued
06-11-2002
June 11, 2002
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in reply to your letters in which you seek a ruling on the application of the sales and use tax to services provided by your client, ***** (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer is an out-of-state nonprofit corporation that provides a proficiency testing program (the "Program") to pathology laboratories in Virginia. The Program evaluates the ability of laboratories to accurately perform diagnostic services. In order to perform its evaluation, the Taxpayer provides proficiency testing materials ("PT Materials") to each laboratory for testing. The laboratory evaluates the PT Materials and reports its findings to the Taxpayer. Upon receipt of the findings, the Taxpayer provides a report evaluating the laboratory's testing accuracy, along with measurement statistics. The evaluation information is also provided to an accreditation organization designated by the laboratory. The Taxpayer charges each laboratory a single subscription amount to participate in the Program.
The Taxpayer seeks to obtain rulings that (1) the Program is a nontaxable service; (2) the PT Materials are themselves deemed to be nontaxable services; (3) if the PT materials are tangible personal property, the Taxpayer would not be subject to the use tax on the materials shipped to Virginia laboratories via common carrier from outside Virginia; and (4) if the use tax does apply to the PT Materials, the Taxpayer is entitled to a credit for tax paid to the state from which the PT Materials are shipped. I will address each issue as presented.
RULING
Services versus Sales (Proficiency Testing Program)
The Taxpayer contends that the "true object" of its Program is the testing service. The laboratories have no use for the PT Materials apart from the testing service, and the materials are disposed of by the laboratories upon completion of the testing. Accordingly, the Taxpayer concludes that the PT Materials are (1) incidental to providing the testing services, and (2) not the sale of tangible personal property.
Code of Virginia § 58.1-609.5(1) provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ...."
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 interprets the exemption and provides that 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, the "true object" of the transaction must be examined.
The "true object" sought by each laboratory is to obtain an assessment of its ability to provide accurate diagnostic services. The PT Materials are provided as a means to facilitate the testing process and are incidental to the provision of the testing services. In accordance with the cited authorities, I agree that the Taxpayer's Program represents the sale of a nontaxable service.
Services versus Sales (PT Materials)
The PT Materials are specimen samples made from human blood products, human and animal materials, and synthetic materials. The Taxpayer contends that its payments to vendors for the PT Materials represent charges for services consistent with determinations set out in Public Documents (P.D.) 89-108 (3/24/89) and 96-168 (7/12/96).
The issue addressed in P.D. 89-108 dealt with the charges made for freeze dried bone for human transplantation. The determination cites Code of Virginia § 32.1-289.1, which prohibits the purchase or sale of any natural body part, but does allow for the recovery of fees associated with the removal and preservation of a body part for medical and scientific purposes. The Tax Commissioner determined that because organs and tissues are donated and not purchased or sold, the fees charged for such items represent service charges for preparing the donated tissue for human transplantation.
The issue addressed in P.D. 96-168 deals with charges for blood purchased from the Red Cross by a hospital. That determination noted that blood (unlike other body parts) can be legally purchased or sold. Notwithstanding, blood is generally accepted in the medical community as human tissue, and the Tax Commissioner determined that fees charged by the Red Cross for testing and processing blood are nontaxable service charges, similar to the charges addressed in P.D. 89-108.
The PT Materials in this case, however, are not natural body parts or blood as contemplated in the rulings and the statute. Rather, they are specimen samples created from blood and materials that are not of human origin. As such, the Taxpayer's payments to its vendors for the PT Materials are not for services, but rather represent payments for tangible personal property.
Use Tax on PT Materials in Virginia
The Taxpayer contends that if the payments for the PT Materials are for tangible personal property, such property is not taxable to the Taxpayer when shipped to Virginia laboratories from vendors or repackagers outside Virginia. The Taxpayer cites a number of prior determinations to support its position.
Code of Virginia § 58.1-604 imposes a tax upon the "use or consumption of tangible personal property in this Commonwealth ...." The term "use" is defined in Code of Virginia § 58.1-602 as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." (Emphasis added.)
The cited rulings address a number of instances in which taxpayers shipped property from outside Virginia to recipients in Virginia. In each case, the property was purchased from vendors outside Virginia and then placed with a common carrier outside Virginia for delivery into Virginia. Based on the definition of "use," the Tax Commissioner determined that each taxpayer in those prior cases made no taxable use of the property in Virginia.
The Taxpayer in this case purchases the PT Materials from vendors outside of Virginia. The PT Materials are delivered to a third party repackager (outside Virginia) or they are shipped by the vendor directly to the participating laboratories. In each case, the PT Materials are delivered into Virginia by U.S. mail or common carrier to the participating laboratories.
It is not clear from the information provided whether the Taxpayer exercises "any right or power" over the PT Materials once they are delivered to the laboratories in Virginia. For example, it is not clear if the Taxpayer imposes requirements on the laboratories regarding the use and handling of the PT Materials. If so, the Taxpayer would be exercising a right over the PT Materials in Virginia. This would constitute a taxable use of such materials that would be subject to the tax. Alternatively, if the laboratories (and not the Taxpayer) exercise total control over the use of the PT Materials once they are received, the tax would not apply to the Taxpayer.
Credit for Taxes Paid
The Taxpayer contends that if it is liable for the Virginia use tax on the PT Materials shipped to the Virginia laboratories, it is entitled to a credit for any sales or use tax paid to the state from which the PT Materials are purchased or repackaged.
Title 23 VAC 10-210-440 provides that "any person who purchases tangible personal property in another state and who has paid a sales or use tax to such state ... is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase." The amount of credit allowed is equal to the tax paid to the other state, but is limited to the 4.5% use tax imposed by Virginia. Further, the credit does not apply to a tax erroneously charged or erroneously paid to the other state. Accordingly, assuming the Taxpayer is subject to the Virginia use tax on the PT Materials, the credit would apply to sales or use taxes properly paid to another state.
Summary
The rulings set out in this letter are based on the facts and information provided by the Taxpayer. A change in facts may lead to a different result. Copies of the Code of Virginia, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
If you have additional questions regarding this matter, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/25785J
Rulings of the Tax Commissioner