Tax Type
Retail Sales and Use Tax
Description
True object test on diskette that contained converted information
Topic
Accounting Periods and Methods
Assessment
Date Issued
10-04-2004
October 4, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****************
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ******** (the "Taxpayer") for the audit period April 1996 through March 1999. I apologize for the delay in the Department's response.
FACTS
The Taxpayer submitted accounting related documents to its vendor for conversion onto compact diskettes (CD's). The vendor scanned the documents onto CD's and transferred them to the Taxpayer for use by its employees. The Department's auditor assessed tax on the charges for imaging services provided in connection with the CD's because the Taxpayer did not pay sales tax on these services at the time of purchase. You maintain that the true object of the sale is the specialized services rendered by the vendor, not the CD's that are ultimately delivered to the Taxpayer.
DETERMINATION
Virginia Code § 58.1-609.5(1) provides, in pertinent part, that the retail sales and use tax shall not apply to "professional, 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(D) interprets this exemption and provides that when a particular transaction involves both the rendering of a service and the provision of tangible personal property, the true object of the transaction must be examined in order to determine whether the transaction constitutes an exempt service or a taxable retail sale.
In Public Document (P.D.) 01-218 (12/19/01), the vendor provided scanning services for the taxpayer. The vendor scanned the taxpayer's historical documents into a computer database program file. Upon scanning, the documents were encoded as digitized computer images in the database file. The database information was provided to the taxpayer via diskette, along with the source materials that were scanned. The Department determined that the taxpayer sought from its vendor the conversion of information from one medium or format to another that was then provided to the taxpayer on a diskette. The true object sought by this taxpayer was to obtain the diskette that contained the converted information. The Department found that the diskette was critical to the transaction and that without it the conversion services would have been of no use to the taxpayer. When the vendor provided the converted information in tangible form, i.e., on a diskette, the total charge was subject to tax.
In this instance, the Taxpayer submits its accounting related documents to the vendor for conversion to CD's. Based on the facts presented and consistent with Title 23 VAC 10-210-4040 and P.D. 01-218, the true object of the transactions at issue is the CD that holds the converted information. The CD is critical to the transaction and without it the conversion services would be of no use to the Taxpayer. Accordingly, when the vendor provided the converted documents to the Taxpayer on CD's, the total amount charged was subject to the tax.
Based on this determination, the assessment is correct. The Department's records indicate there is no outstanding balance for the assessments at issue. Therefore, no additional payment is due from the Taxpayer, and the Department will not issue a refund to the Taxpayer.
The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/38296P
Rulings of the Tax Commissioner