Tax Type
Retail Sales and Use Tax
Description
Services; Professional or personal; Computerized drafting services
Topic
Taxability of Persons and Transactions
Date Issued
09-29-1995
September 29, 1995
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear***********************
This is in reply to your draft letter included in the department's audit of your company, *************the "Taxpayer"), for the period October 1989 through August 1993. I have treated your letter as an application for correction of the assessment under Code of Virginia § 58.1-1821.
FACTS
The Taxpayer operates an engineering and architectural firm which also provides computer aided drafting design (CADD) services. The Taxpayer, in a typical project, receives design documentation from a customer which is scanned into a computer. The design image is then converted into a CADD format, the parameters of which are verified by a physical study of the customer's site. Any discrepancies and potential modifications are noted and the design image is revised accordingly. The end product is provided to the customer on computer floppy disks and/or on paper. A second type of project is similar to the foregoing without the scanning or conversion steps. The physical survey is still accomplished with modifications to the design and the resulting product is delivered in the same manner.
The Taxpayer indicates that its business is a combination of drafting and engineering services and requests clarification on the application of the tax to the foregoing, as well as to various other transactions.
DETERMINATION
Code of Virginia § 58.1-609.5(1) provides an exemption from the tax for "personal service transactions which involve sales as inconsequential elements for which no separate charges are made...."
In determining whether a transaction is subject to the tax, the department applies the true object test which is explained in Virginia Regulation (VR) 630-1097.1. In analyzing the transaction, the Taxpayer's "typical" and secondary projects include the "scanning" of customer data, its conversion to the CADD format, a physical confirmation of customer data, and the modification of the confirmed data in the CADD format. The result of the foregoing is the "end product" which is the disk or paper report format. While there is an element of expertise involved in bringing together the necessary functions to develop the end product, the customer seeks to secure the property produced. As such, the true object of the transaction is the tangible finished product.
Furthermore, VR 630-10-95(A)(1), defines "sales price" as "the total amount for which tangible personal property or taxable services are sold and includes any service in connection with such sale." (Emphasis added). Accordingly, the Taxpayer must charge tax on the total sales price of the end product to customers.
- With regard to the various questions in your letter, the following is provided:
- Q. At what point does the tax apply to the architectural and engineering consulting services versus the drafting design?
- A. If the final product your customer seeks is the product, tax would apply. If the object of the transaction sought by the customer is the intangible knowledge or expertise that produces a product, the transaction would not be taxable. The department's district office is available to answer any questions or to assist you in your decisions. Some examples of services versus sales are enclosed in the form of Public Documents. For your information a brief synopsis follows:
P.D. 95-90 (04/28/95) - The Taxpayer provided photogrammetric services to obtain detailed dimensioned survey plats much like those produced by a surveyor. The plat reports are created from aerial photographs to show the topography, contours, and positions of sizeable land areas. The department agreed that the value of the end product, i.e., the plat or survey report was insignificant in comparison to the value of the service provided. Therefore, the "true object" of the transaction was the provision of the service rather than the tangible personal property produced.
P.D.'s 94-199 (06/24/94) and 90-60 (04/12/90) - P.D. 90-60 indicates that the provision of concept and graphic design for packaging intended to convey promotional information to the public is generally exempt from the tax. However, the more current public document, in reiterating the exempt status of such services, also notes that such creative and design services which result in a tangible product in connection with such nonmedia or nonpromotional purposes would be taxable.
P.D. 91-109 (06/28/91) - The Taxpayer in this ruling provided a variety of services including data conversion. Maps or documents were generally produced by the Taxpayer in the form of computer-aided drawings made on mylar sheets or computer tapes which contained the mapping information. The mapping information would come from a variety of sources including the Taxpayer's customer. The department's auditor assessed tax on the conversion of existing customer records and information into computer tapes. While the department adjusted the audit for those services which updated or changed customer provided maps, in mylar or computer form, the charges for the conversion of customer-owned records into a computerized map remained taxable.
P.D. 91-268 (10/23/91) - The Taxpayer in this ruling is an architectural firm which had purchased blueprints from a third party for its own use on which the tax was properly paid. The Taxpayer was considering producing its own blueprints and requested a ruling on the probable tax treatment. The Tax Commissioner's ruling held that even if the blueprint was purchased from a third party or produced in-house, it would be an incidental nontaxable component when furnished to the client in connection with architectural design work or other professional service transactions. However, the Tax Commissioner additionally provided that the sale of additional sets of blueprints would constitute a taxable transaction.
Q. A portion of the Taxpayer's business is derived from "brokers" (third parties soliciting work from their clients and subcontracting the work to the Taxpayer). The end product is delivered to brokers who resell to their clients.
A. The taxable sale of the end product as described above also applies in the sale to the broker (third parties soliciting work from their clients and subcontracting the work to the Taxpayer). However, the broker may submit to the Taxpayer a resale certificate of exemption, Form ST-10, and purchase the product free of the tax. The broker will then be responsible for collecting the tax from the customer.
Q. A project may encompass a wide variety of in-house data conversion, some of which may be subcontracted out, with the remainder completed in-house by the Taxpayer. The Taxpayer questions the application of tax on this transaction if the subcontracted work is purchased by the Taxpayer and resold to the customer.
A. In this instance the true object of the transaction is the disk produced by the data conversion. Therefore, the subcontractor should charge tax in this transaction. However, since you are selling this same end product to the customer, you may present the subcontractor with a resale exemption certificate, form ST-10. I have enclosed a copy of a previous ruling, P.D.92-159 (08/27/92), for further explanation.
Q. There are some instances when transactions (2) and (3) occur in one project. In such a case the Taxpayer is contracted to perform a survey, and in turn subcontracts certain portions of the project which the Taxpayer cannot perform. You question the application of the tax in such a transaction.
A. In this particular situation, the true object of the transaction is the provision of the professional expertise by your firm. Since the object of the transaction is not of a tangible nature, the survey would be considered a nontaxable service. If a portion of the survey is subcontracted to another entity, that portion too appears to be a nontaxable service.
Q. A portion of the Taxpayer's business involves the plotting of CADD files. A customer will furnish the CADD file which the Taxpayer edits and modifies as required so that a resulting hard copy can be returned to the customer along with the modified file.
A. This transaction is similar to fabrication. Therefore, the charges for the "plotting" of the CADD files, inclusive of labor charges, and the provision of the report are taxable.
Based on the information presented, I find that the assessment was correct. However, due to the delay in responding to your letter, I will allow for the waiver of interest that has accrued since the date of the assessment. Payment for the balance of tax and interest, totaling************** should be submitted to the department's Office of Tax Policy, P. O. Box 1880 Richmond, Virginia 23282-1880.
If you need additional assistance regarding this matter, please contact********with the department's Office of Tax Policy at *****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8866Q
Rulings of the Tax Commissioner