June 2, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of ***** (the “Taxpayer”), in which you contest the retail sales and use tax assessment issued for the period July 2014 through June 2017. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates an audio visual, video conferencing and security system business. The Taxpayer installs and integrates high-end custom automated home theaters, speakers, lighting, and security systems for residential and commercial customers. As a result of the Department’s audit, the Taxpayer was assessed sales tax relating to programming and trip charges that were made in connection with the sale of tangible personal property. The programming charges relate to the programming of home video and audio systems. The trip charges relate to charges for technicians for the provision of programming services.
The Taxpayer contests the tax and interest assessed with respect to the programming and trip charges. The Taxpayer contends that the programming charges are not taxable under Title 23 of the Virginia Administrative Code (VAC) 10-210-4040, which addresses the application of sales tax to charges for services provided in connection with sales of tangible personal property. The Taxpayer states that the programming services are optional, separately stated charges for which the true object of the transaction is to purchase a service and not to secure the property which it produces. The Taxpayer also contends that the trip charges are exempt as a separately stated transportation charge.
DETERMINATION
Programming Charges
Virginia Code § 58.1-603 imposes the Virginia retail sales tax upon “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth….” The tax is computed on the gross sales price of tangible personal property and services that are expressly stated as taxable under Virginia law. “Sales price” is defined in Virginia Code § 58.1-602 as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale…without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.”
Title 23 VAC 10-210-4040 A addresses the application of the tax to mixed transactions and states:
Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with 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 of this section, the "true object" test is used to determine the taxability of these transactions.
Title 23 VAC 10-210-4040 C 3 provides that “[s]eparately stated labor or service charges for the repair installation, application or remodeling of tangible personal property” are exempt services.
In addition, Title 23 VAC 10-210-4040 C 7 provides that “[a]n amount separately charged for labor or services rendered in connection with the modification of prewritten programs as defined in § 58.1-602 …” is an exempt service. Under Virginia Code § 58.1-602, a prewritten program is defined as “a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties.”
The Taxpayer provides optional programming services to customize audiovisual equipment purchased by customers. Programming services are separately stated on customer invoices. The Taxpayer states that these services are optional, but customers often prefer to have a trained professional customize and program the equipment. The Taxpayer contends that these charges are (1) exempt as charges for installation and/or as modifications of prewritten programs and (2) the true object of the transaction is to purchase a service.
A sample of the Taxpayer’s invoices shows that the Taxpayer charges a separate installation charge that was properly not taxed in the audit. The programming charges, however, are services to customize audiovisual equipment and are separately stated from the installation charges. The Taxpayer states that the systems are fully operable without a technician performing any programming services.
Based on this information, the programming services are not a separately stated labor or service charge for the repair or installation of tangible personal property. Additionally, the charges are not for the modification of prewritten programs, as the technicians are not modifying a computer or software program. Rather, they are programming audiovisual equipment. Finally, the audiovisual equipment is the true object of the contested transactions. The services provided by the Taxpayer are of no value to customers without the tangible audiovisual equipment. Generally, any charges for labor or services that are related to the sale of audiovisual equipment become part of the taxable sales price. These same services are exempt from the tax pursuant to the true object test when provided without the sale of equipment or other tangible personal property.
Trip Charges
Virginia Code § 58.1-609.5 3 provides a sales and use tax exemption for, "[t]ransportation charges separately stated." Title 23 VAC 10-210-6000 interprets the exemption and states, "[t]he tax does not apply to transportation or delivery charges added to a taxable sale provided such transportation charges are separately stated on the invoice to the customer. If the transportation or delivery charges are not separately stated on the invoice, they will become part of the sales price of the property and will be subject to the tax." The regulation defines transportation and delivery charges as “charges for delivery from the seller to the purchaser.”
The Taxpayer includes a separately stated fee for providing a technician to provide separately stated programming services. The Taxpayer states that these charges are exempt under Title 23 VAC 10-210-4040 C 4, which states that separately stated transportation charges are exempt services. The Taxpayer states that equipment that is delivered is incidental to the provision of the technician service as such equipment could be delivered by common carrier to the customer, but is delivered by the technician for the convenience of the customer. Based on the statute and regulation, these charges do not qualify as exempt transportation or delivery charges. The charges are not for the transportation or delivery of the product to the customer, but rather are for providing a technician to the customer.
CONCLUSION
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. Please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 23203, Richmond, Virginia 23261-7203.
The Code of Virginia sections and regulations cited, along with other reference documents, 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1666H