Document Number
08-197
Tax Type
Retail Sales and Use Tax
Description
True object test and determined the contracts were for the sale of tangible personal property for the RFID system
Topic
Tangible Personal Property
Taxable Transactions
Date Issued
12-19-2008


December 19, 2008




Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the audit period August 2003 through February 2007. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer is in the business of designing, testing, installing and deploying Radio Frequency Identification (RFID) Systems for its customers. This technology uses radio waves to identify customer products by storing a serial number in the form of an identification tag or label. This information is used by customers to track the location or movement of a product and for counting and documenting inventory. These systems include software, printers, antennas, readers, mobile tagging stations and other tangible personal property, as well as supplies necessary for the system to function. Included with the provision of the system are various services such as consulting, planning and design, analysis, testing, training and other services necessary for the implementation of the RFID system.

The Department's auditor reviewed two contracts the Taxpayer entered into and determined the contracts involved both the sale of tangible personal property and the rendering of services. The auditor applied the true object test and determined the contracts were for the sale of tangible personal property. Based on this finding, the auditor held that the total charges for each contract were subject to the sales tax:.

The Taxpayer contends that the design, development services, expertise and knowledge, and other services are the true object of the contracts until there is an actual sale and delivery of tangible personal property, i.e., the RFID hardware and other supporting tangible personal property. The Taxpayer seeks an adjustment of the Department's assessment.


DETERMINATION


Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax does not apply to professional or personal service transactions that involve sales as inconsequential elements for which no separate charges are made.

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A, charges for services are exempt from the retail sales and use tax, but services provided in connection with the sale of tangible personal property are generally taxable. When a transaction involves both the sale of tangible personal property and the provision of services, generally the transaction is either taxable or exempt on the full amount charged, regardless of whether the charges for the services or the property are separately stated. The true object test is used to determine the taxability of these transactions.

Title 23 VAC 10-210-4040 D sets out the guidelines used to determine the "true object" of a transaction that includes both the sale of tangible personal property and the provision of services:
    • 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 which it produces, then the entire charge, including the charge for any services provided, is taxable.

In this case, the contracts reveal that the true object of each contract is for the provision of tangible personal property, the RFID system. The services the Taxpayer seeks to exempt represent the underlying cost of labor and services and would be of no value to the customer without the delivery of the RFID System. Therefore, the services were properly held taxable as components of the total amount for which the RFID systems were sold.

Virginia Code § 58.1-602 defines "sales price" as the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. This statute specifically provides that sales price is computed without a deduction for the cost of the property sold, cost of materials used, or cost of labor or services. Based on this statutory language, the total amount for which the RFID systems were sold, which includes labor and service costs incurred in designing and developing the systems, are subject to the sales and use tax. While such services could be exempt when provided on a stand alone basis without the sale of tangible personal property, such services are properly taxable when they are provided in conjunction with the sale of tangible personal property. In this instance, because such charges are in connection with the sale of the tangible personal property, they are taxable even if the various services and items of tangible personal property provided were separately stated within the contract charges.

The Taxpayer asserts that installation services are included in the charges held taxable. Virginia Code § 58.1-609.5 2 and Title 23 VAC 10-210-4040 C provide that separately stated installation charges are excluded from the definition of "sales price" and, therefore, are not subject to the retail sales and use tax. However, the documentation provided by the Taxpayer does not separately state any amounts for installation charges. It is feasible that charges for installation services were included in amounts billed to the Taxpayer's customers, but such charges were not separately stated on the invoice issued to the customer. Furthermore, no written evidence or documentation has been presented to support the Taxpayer's claim. Because the Taxpayer has not satisfied the statutory requirement that charges for installation charges must be separately stated, there is no basis for adjusting the assessment.

CONCLUSION


Based on the foregoing, the assessment is correct as issued. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.

The Code of Virginia sections and regulations 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 Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner




AR/1-1549731920.Q


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46