Document Number
Tax Type
Retail Sales and Use Tax
Taxable rentals of tangible personal property /tax on untaxed rentals /set-up charges
Appropriateness of Audit Methodology
Date Issued

October 29, 2004

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 assessment issued to ***** (the "Taxpayer"), for the period June 1999 through March 2002. I apologize for the Department's delay in responding to your letter.

The Taxpayer primarily rents inflatable amusement games such as moonwalks, slides and obstacle courses. In connection with these rentals, the Taxpayer furnishes a person, who it refers to as an "operator," who sets up the game, loads and unloads the participants, and takes down the game. The Taxpayer also rents other tangible personal property and provides the services of disc jockeys and clowns. As a result of the Department's audit, the auditor concluded that the Taxpayer is engaged in making taxable rentals of tangible personal property and assessed the tax on untaxed rentals and set-up charges.

The Taxpayer disputes the tax with regard to rentals of its games with an "operator." In addition, the Taxpayer disputes the tax assessed on rentals of games and other property to churches because it accepted exemption certificates. The Taxpayer claims this practice is consistent with advice it received from the prior auditor. Lastly, the Taxpayer questions the application of the tax to the services provided by disc jockeys and clowns and to set-up charges.


Virginia Code § 58.1-603 imposes the sales tax on the lease or rental of tangible personal property in the Commonwealth. The tax is computed on the gross proceeds derived from such lease or rental.

Virginia Code § 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 addresses the application of the tax to service transactions and states, "Charges for services generally are exempt from the sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." The regulation describes the "true object" test used in determining whether a transaction involving both the rendition of services and the provision of tangible personal property constitutes an exempt service or a taxable retail sale.

Virginia Code § 58.1-602 defines a "sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration . . . ." The same statute defines "sales price" to mean the "total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . ."

I will address the Taxpayer's questions regarding services in light of the above authorities.

Rental of Amusement Games with Operator

When the Taxpayer rents its games, the "operator" is more accurately an attendant who primarily monitors the operation and use of the game. In applying the "true object" test, the object of the Taxpayer's customers is the rental of the game and not the skills of the attendant, as the game can operate with or without the attendant. After reviewing the audit report and the facts presented, I agree with the auditor's conclusion that the Taxpayer is engaged in making taxable rentals, and the tax applies to the gross proceeds derived from such rentals.

The Taxpayer's rental of games with an attendant is quite different from other instances in which the Department has determined that the rental of equipment with an operator constitutes a nontaxable service. For example, a crane rented with an operator is considered a nontaxable service because the "true object" of the transaction is to obtain the operator's skills in using the crane. The operator exerts certain skills and maintains complete control over the crane during its operation. Public Document (P.D.) 91-19 (2/21/91) addresses crane rental with and without an operator.

The Taxpayer's rental transaction is more like the balloon rental in P.D. 01-56 (5/14/01). In that instance, hot air parade balloons were determined to be taxable rentals, even though the rental company provided supervision and assistance while the balloons were in usage.

Disc Jockeys and Clowns

The Taxpayer books the services of disc jockeys and clowns and invoices the charges for such services to its customers. These services do not involve the exchange of tangible personal property and may be provided at the time of rental of a game or without such rental.

When the Taxpayer makes rentals of its games and provides services that are directly related to the game, such services are considered services in connection with the rental of the game. The charges for these services are considered a part of the gross proceeds and are taxable in accordance with the definition of "sales price." When the Taxpayer provides the services of disc jockeys and clowns that are not directly related to the rental of a game, the charges for such are not taxable in accordance with the services exemption and the regulation. In order for the exemption to apply, these charges must be separately stated on the invoice from the rental charges for any property.

Set-Up Charges

The Taxpayer charges a labor charge for setting up tables and chairs it rents to its customers. In accordance with the definition of "sales price," the set-up charges are taxable as services in connection with the rental of the tables and chairs. The application of the tax to set-up charges is discussed in more detail in P.D. 97-289 (6/26/97).

Exemption Certificates for Churches

The regulation regarding the use of exemption certificates in Title 23 VAC 10­210-280 provides that "reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate."

The exemption certificate available to certain nonprofit churches (Form ST-13A) clearly specifies the types of purchases that may be made exempt from the sales and use tax. In addition, the certificate states at the bottom, "NOTE: This exemption certificate does not provide exemption for any tangible personal property purchased by a church other than that specified above."

I have reviewed the prior audit of the Taxpayer and there is no documentation to support your claim that the auditor advised the Taxpayer to make tax-exempt rentals to the churches. The exemption certificate and the requirements of Title 23 VAC 10-210­280 impose a duty on the dealer to exercise reasonable judgment to ensure that purchases are consistent with the wording of the exemption certificate. The Taxpayer's rentals of games and other property assessed in the audit are clearly outside the scope of the wording of the certificate. The auditor properly applied the tax to these transactions.


Based on the foregoing, the assessment is upheld. The Taxpayer will receive an updated bill shortly that will include accrued interest. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest charges and penalties (see attached insert for penalty information).

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's website, located at If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner


Last Updated 08/25/2014 16:46