June 30, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which ***** (the “Taxpayer”) seeks correction of the retail sales and use audit assessment issued for the period August 2013 through September 2016. It is noted that the assessment is paid. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a bowling alley in Virginia. One of the products offered by the Taxpayer is a bowling package called “Cosmic Bowling” (hereinafter “Package”). The Package allows the customer unlimited bowling for a specific period of time, usually three hours. The Package also offers the customer bowling shoes should the customer require them. The auditor assessed the sales tax on the lump sum charges for the Packages because the shoes are offered as part of the Package.
The Taxpayer contests the tax and claims that the majority of its customers bring their own bowling shoes. The Taxpayer contends that the cost for the Package is the same regardless of whether the customer is provided the bowling shoes or brings their own. The Taxpayer argues that the bowling shoes are offered free of charge as an option to the customer, and the charge for the Package represents a charge for the bowling services. For this reason, the Taxpayer requests the tax assessed on the sales of the Packages be removed from the audit.
DETERMINATION
In this instance, the Taxpayer’s Package represents a mixed transaction that offers the elements of a service or intangible entitlement (bowling activity) and tangible personal property (bowling shoes). To address this type of transaction, the Department’s services policy is instructive.
Virginia Code § 58.1-609.5 1 provides that the retail sales and use tax does not apply to "[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 interprets the exemption statute and states in subsection A that:
Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection the sales of tangible personal property are taxable. Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated.
As explained in subsection D, the "true object" test is used to determine the taxability of these transactions. Title 23 VAC 10-210-4040 D states:
In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. 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.
The true object test is applicable to the Package at issue. The Taxpayer’s customer seeks to obtain the opportunity to engage in the activity of bowling. While the bowling shoes may be an element of the Package as an option, it is not the true object of the Package transaction. The true object is the bowling activity. Therefore, I find that the sale of the Package is not subject to the sales tax. Accordingly, the audit will be adjusted to remove the tax assessed on the charges for the Packages.
CONCLUSION
In accordance with this determination, the audit will be referred to the appropriate field audit staff for revision. After the revision is completed, the Taxpayer will receive a revised audit report. In addition, a refund of the overpayment as determined by the revised audit liability, plus applicable interest, will be issued to the Taxpayer.
The Code of Virginia and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you should have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1100.T