Tax Type
Retail Sales and Use Tax
Description
Company A is providing an exempt service monthly management fee is not taxable
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
10-17-2006
October 17, 2006
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on the application of retail sales and use tax to a business services agreement between ***** (the "Taxpayer") and ***** ("Company A"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer has entered into an agreement with Company A for the provision of website expense management services. Under the terms of the agreement, the Taxpayer is granted a nonexclusive, nontransferable right to access a designated website and use of the expense management software. At year-end, Company A provides the Taxpayer with a CD that contains expense reports for the year. Company A charges the Taxpayer a monthly management fee for the provision of its services.
RULING
Virginia Code § 58.1-609.5 1 provides an exemption from the retail sales and use tax for:
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- Professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . and services not involving an exchange of tangible personal property which provide access to or use of . . . the Internet and any other related electronic communication service, including software, data, consent and other information services delivered electronically via the Internet.
Title 23 of the Virginia Administrative Code 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 Department uses the "true object" test 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. If the object of the transaction is to obtain a service and the property transferred to the customer is not critical to the transaction, then the transaction constitutes an exempt service. If the object of a transaction is to secure the property produced with the service, the entire charge, including the services provided, is taxable.
The Taxpayer's agreement sets out a range of services provided by Company A that includes automatic expense report and vendor payment request processing services, routing, approval, and processing services, and support for employee reimbursement. Company A also provides telephone support services and electronic receipt imaging that digitizes receipts and attaches them to the respective expense report, thereby eliminating hard copy receipts and invoices.
After reviewing the Taxpayer's agreement, I find that the "true object" of the transaction is the acquisition of services. The "true object" sought by the Taxpayer is to obtain the professional services and expertise of Company A to manage the Taxpayer's expense reports and reimbursements. As such, Company A is providing an exempt service as set out in Va. Code § 58.1-609.5 1, and the monthly management fee charged by Company A to the Taxpayer is not taxable.
This response is based on a review of the service agreement provided and the facts presented in your letter. Any change in facts or a change in the terms of the agreement may lead to a different result.
The Code of Virginia section and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this ruling, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/55039T
Rulings of the Tax Commissioner