Tax Type
Retail Sales and Use Tax
Description
Training materials
Topic
Property Subject to Tax
Date Issued
12-15-1993
December 15, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter of May 4, 1993 in which you seek correction of a sales and use tax assessment for*************** (the "Taxpayer") for the period June 1990 through September 1992.
FACTS
The Taxpayer is a franchise operation that provides computer training services to corporations, government agencies and individuals. The Taxpayer charges a lump sum fee for tuition and all course materials. The Taxpayer purchases its supplies exempt from sales and use tax from its franchisor located outside Virginia. The auditor assessed use tax on training materials used by the Taxpayer. You contend that there are no charges for the materials and the royalty fee picked up in the audit is charged back to the Taxpayer when it receives the materials as a tracking tool.
DETERMINATION
Application of tax: Va. Code §58.1-609.5(1) (formerly Va. Code §58.1-608(A)(5)(a)) provides an exemption from the sales and use tax for professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made.
As noted in Virginia Regulation (VR) 630-10-97.1, "in order to determine whether a particular transaction 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."
The true object of the transactions at issue is the provision of training services by the Taxpayer. Therefore, the entire charge for such services, including charges for materials provided by the Taxpayer to course participants, qualifies for exemption from the tax.
Because the Taxpayer is providing an exempt service, it is deemed the user and consumer of all items purchased for use in providing that service. The Taxpayer must either pay the tax to its suppliers at the time of making its purchases or remit use tax directly to the department based on the cost price of the items.
You contend that the charges for the materials are included in the royalties paid to the franchisor for the service of course development. The department has previously ruled that royalty charges paid by a taxpayer are not subject to the tax if the charges are only for the intangible right to use the franchisor's name. If the royalty charges include tangible personal property, the tax applies. P.D. 91-29 (3/11/91). In this case, the Taxpayer is paying royalties to the franchisor to use the products and services; therefore, there is an exchange of tangible personal property and the transaction is taxable.
It should be noted that if the Taxpayer sells training materials independent from its provision of classroom instruction, the Taxpayer is deemed to be a retailer. In such a case, the Taxpayer must either purchase the materials exempt from the tax under a resale certificate of exemption and then collect the tax from its customers at the time of resale or remit the tax directly to the department based on the sales price of such items.
Assessment of interest: Because the recent audit by the department was the first audit of the Taxpayer, no penalty was assessed. However, in accordance with the provisions of VR 630-10-80, the application of interest to all audit deficiencies is mandatory.
Offer in compromise: Va. Code §58.1-105 authorizes the Tax Commissioner to accept an offer in compromise of taxes if it is determined that the assessment is based upon a doubtful or disputed claim or that the tax liability is of doubtful collectibility. In this case, the application of the law is clear. However, you assert that payment of the assessment would have a drastic impact on the Taxpayer's financial stability. If the Taxpayer wishes to submit an offer in compromise, it should be mailed to the department's Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23282-1880. In accordance with VR 630-1-105 (copy enclosed), an offer based on doubtful collectibility must include signed financial statements in sufficient detail to indicate the financial condition of the Taxpayer. If an offer and the required financial information is not submitted within 30 days, the department will resume collection action.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6971F
Rulings of the Tax Commissioner