Document Number
06-105
Tax Type
Retail Sales and Use Tax
Description
The true object of the agreement is the provision of IT services
Topic
Taxable Transactions
Date Issued
10-05-2006


October 5, 2006



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 April 1998 through May 2003. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer entered into an agreement to provide comprehensive information technology (IT) services to affiliated companies. The services provided include the design, development and maintenance of internal software programs, the management, operation and monitoring of wide and local area networks, mainframe processing, hosting of licensed software applications, and the management, operation and monitoring of telephone systems. The Taxpayer invoiced its affiliates for the services provided, listing services, hardware and software separately on the invoice. As a result of an audit, the Department's auditor concluded that the hardware elements listed on the invoice by the Taxpayer constituted a taxable lease of tangible personal property. The Taxpayer disagrees and contends that the "true object" of the transaction is its provision of IT services. The Taxpayer seeks to have the tax removed from the transactions at issue.


DETERMINATION

Virginia Code § 58.1-609.5 1 exempts from the retail sales and use tax "[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 provides that 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. In subsection D, the regulation explains that the "true object" test is used to determine 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. This subsection states:
    • 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 that it produces, then the entire charge, including the charge for any services provided, is taxable.

Based on a review of the information presented, the "true object" of the Taxpayer's agreement is the provision of services. While the terms of the agreement require the Taxpayer to provide certain tangible property, such items are provided as part of and facilitate the primary objective of the agreement, the provision of IT services. The information provided demonstrates that the Taxpayer owns, manages, operates and monitors the equipment at issue. The Taxpayer is not leasing tangible personal property to its affiliates. The true object of the agreement is the provision of IT services. Therefore, the Department's assessment of tax on the equipment at issue will be abated.

Please note that Title 23 VAC 10-210-4040 subsection E also provides that "a service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services." Therefore, the Taxpayer is liable for the payment of the sales tax to its suppliers of tangible personal property used in Virginia in providing its services. In this instance, the Taxpayer has properly paid the tax on its purchases of tangible personal property used in providing its services.

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

                • Jane E. Bowen
                  Tax Commissioner



AR/51976Q

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46