April 21, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of a sales and use tax assessment issued to ***** (the "Taxpayer") for the period March 2010 through February 2013. I note that the assessment has been paid in full. I apologize for the delay in responding to your request.
FACTS
The Taxpayer operates retail grocery stores in Virginia. At issue is the tax assessed on ten interactive distributed generation systems (IDG) installed at each of the Taxpayer’s store locations. The auditor assessed the tax on the monthly charge for the IDG systems as a taxable lease of tangible personal property based on the tax application in Public Document (P.D.) 96-146 (6/21/1996). The Taxpayer contests the tax assessed on the monthly charges for the IDG systems and maintains the charges are for the provision of nontaxable services. The Taxpayer paid the assessment and seeks a refund of the tax paid on the contested fees for the IDG systems services.
DETERMINATION
True Object Test
Virginia Code § 58.1-609.5 1 provides an exemption 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 interprets this exemption and provides that when a particular transaction involves both the rendering of a service and the provision of tangible personal property, the true object of the transaction must be examined in order to determine whether the transaction constitutes an exempt service or a taxable retail sale. Title 23 VAC 10-210-4040 D 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 a 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 instances where both the services rendered and the property transferred are critical elements of the transaction, the degree of customization, uniqueness or specific services provided in connection with the product shall be considered in determining its appropriate tax status.
The auditor relied on P.D. 96-146 in assessing the tax to monthly charges for the IDG systems. In P.D. 96-146, the taxpayer entered into a contract with the federal government to design, manufacture and install uninterruptible power systems (UPS) at existing facilities. The UPS provides continuous electrical power to critical equipment or machinery in the event of a loss or reduction in power. Based on a review of the Statement of Work, the taxpayer was required to manufacture, test, transport, install, start-up, train personnel, deliver and initially maintain the UPS systems for one year under the warranty period. If ordered by the government, the taxpayer provided extended maintenance of all UPS on a year-to-year basis. The Tax Commissioner determined that while the taxpayer was contractually obligated to perform various services, the true object of the contract was the government’s procurement of the UPS systems.
In this instance, the Taxpayer entered into a ten year contract with the contractor for the provision of standby power. Under the terms of the contract, the contractor will install the IDG systems at the Taxpayer’s store sites and provide 24/7 remote monitoring of the IDG systems to detect and assure proper standby mode response to outages. The contractor pays the Taxpayer a $1 annual fee to locate the generation equipment on the Taxpayer’s premises and maintain interconnection to the electric grid at each site. The contractor is responsible for all operating expenses and installation costs, IDG system components, maintenance, and fuel management. The contractor charges the Taxpayer a monthly fee at a rate of $4.50 per kilowatt per store for the standby power. In the event of a power outage, the contractor remotely switches the site to generator power. The contractor also provides load management services for the electric utility and coordinates with the electric utility to switch the Taxpayer to generator power at peak periods. The Taxpayer is charged only the fuel cost of producing the energy that the Taxpayer utilizes from the onsite generating facility during outages and for load management purposes. The Taxpayer does not take possession of the IDG systems and cannot purchase the equipment from the contractor. At the end of the ten year agreement, the IDG systems are removed in the case of nonrenewal.
Unlike the government contract for the sale and installation of UPS systems in P.D. 96-146, the Taxpayer, in this instance, seeks the contractor’s provision of IDG services to ensure standby power in the case of a utilities outage. Based on these facts, I find that the true object of the contract is the contractor’s provision of continuous electrical power in the event of a power outage. Accordingly, the audit will be adjusted to remove the tax assessed on the monthly charges for the IDG system services.
CONCLUSION
In accordance with this determination, this case will be referred to the appropriate field audit staff to revise the audit. Because the Taxpayer has paid the audit assessment in full, a refund of the overpayment of tax as determined by the revised audit liability, plus applicable interest, will be issued to the Taxpayer. The Taxpayer will be notified in writing and provided a copy of the revised audit report after the audit revisions are completed.
The Code of Virginia section, regulation and public document cited are available on¬line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this letter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
704.T