Tax Type
Retail Sales and Use Tax
Description
Resales; Warranty documents
Topic
Taxability of Persons and Transactions
Date Issued
05-16-1994
May 16, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to************* (the "Taxpayer") for the period November 1989 through August 1992. I note that the audit assessment, which has been revised to remove penalty charges on the contested items, has been paid in full.
FACTS
The Taxpayer produces and administers extended warranty contracts which are underwritten by a third-party property and casualty insurance company. In performing this enterprise, the Taxpayer designs the artwork and terms of the contracts, has the contracts printed, purchases plastic "clamshell" packaging for the contracts, and assembles and ships the contract package to retail stores. Retailers sell the extended warranty contracts to their customers who desire an extended parts and labor warranty when purchasing appliances, electronic equipment and other products.
The Taxpayer was assessed tax on its purchases of the "clamshells" and cardboard liners of the contract package. You maintain, however, that these items are exempt because: i) they are tangible personal property purchased by the Taxpayer for resale through retailers to consumers; and ii) the contested items constitute exempt packaging materials.
DETERMINATION
Va. Code §58.1-604 imposes the tax on the use or consumption of each item or article of tangible personal property in Virginia. "Use" is defined in §58.1-602 to mean "the exercise of any right or power over tangible personal property ... except that it does not include the sale at retail of that property in the normal course of business." That same Code section further provides that "the term 'tangible personal property' shall not include stocks, bonds, notes, insurance or other obligations or securities." (emphasis added)
It is evident in the instant case that the product which the Taxpayer sells, an obligation to protect a consumer's purchase, constitutes a service. It is also evident that the contract package is necessary to market and help administer that service. However, I cannot agree that the component parts of that package are purchased for resale in the normal course of business since the Taxpayer's business is the sale of a nontangible service.
In this light, the contract package is analogous to printed leases, insurance contracts, sales agreements and similar items used and consumed to facilitate business transactions. Such items are clearly tangible and may be transferred from buyer to seller, or from lessor to lessee. However, while these items are an integral part of a transaction, they are not an integral part of the property sold, and are thus taxable.
Nor is this determination inconsistent with Virginia Regulation (VR) 630-10-62.1(D) which indicates that parts and labor maintenance contracts represent the sale of tangible personal property. Charges for these kinds of maintenance contracts are taxable because of the potential provision of tangible repair parts and not because of any tangible contract or marketing package which may be furnished to purchasers.
Having determined that the Taxpayer is a service provider, the packaging exemption available to wholesalers or retailers for containers and packaging materials under VR 630-10-26 is not applicable. Moreover, this exemption would not apply even if the Taxpayer sold parts and labor warranty contracts directly to consumers, and was thus required to register as a dealer in accordance with VR 630-10-62.1(D). In that instance the contested items would still be deemed to be property used and consumed by the Taxpayer in the rendition of its service.
Accordingly, I find that the contested purchases are properly included in the audit and that the assessment is correct.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7162I
Rulings of the Tax Commissioner