Tax Type
Retail Sales and Use Tax
Description
Computers, services, and software; Credit reporting service
Topic
Taxability of Persons and Transactions
Date Issued
04-07-1995
April 7, 1995
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letters seeking correction of sales and use tax assessed to************ (the "Taxpayer") for the period January 1991 through December 1993.
FACTS
The Taxpayer, which operates as a bank, contracted with************** ("Food Service") for the management and operation of the food service facilities located on the Taxpayer's premises. At issue is the application of the tax to management fees paid by the Taxpayer in connection with such contract. The Taxpayer also raises other issues which will be addressed separately.
DETERMINATION
Management Fees: The Taxpayer, under contractual agreement, pays a fixed monthly management fee to the Food Service. In connection with this contract, the Food Service is required to "furnish all necessary goods, services, and lawful requirements...to provide a quality food service operation" for the Taxpayer. The prices at which items will be sold as well as the menu selection are subject to approval by the Taxpayer; however, the Food Service bears the risk of profit and loss in the operation. The Food Service collects all sales tax on sales of food to the Taxpayer's employees, visitors, etc., and remits that tax to the department.
Code of Virginia §58.1-609.5(1) provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...."
In order to determine whether a particular transaction which 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. See Virginia Regulation (VR) 630-10-97.1 (copy enclosed).
A review of the "Food Service Contract" furnished by the Taxpayer indicates that there is no transfer of food to the Taxpayer for a consideration. In fact, the Food Service holds title to all food procured for subsequent sale to the ultimate consumer (the Taxpayer's employees, visitors, etc.).
Lastly, there is no evidence in the contract that indicates the management fee is intended to subsidize the sales price of the food sold. In fact, the management fee is a fixed monthly charge paid by the Taxpayer to the Food Service for administrative and management purposes.
Based upon the foregoing, the "true object" sought by the Taxpayer is to obtain the professional services of the Food Service to operate its food service facility. In consideration thereof, the Taxpayer pays a monthly management fee. As such, the management fees are exempt charges in connection with the provision of a service as set out in Code of Virginia §58.1-609.5(1). Accordingly, the management fees will be removed from the assessment.
Sample Method: The Taxpayer questions the sampling method used by the auditor and contends that a credit resulting from a certain accrual was excluded from the sample period while yet another credit remained.
The auditor detailed all use tax accruals in excess of $1,000 for the entire audit period. This detailed examination revealed that the Taxpayer had paid the tax to its vendor and also erroneously accrued and remitted the tax to the department on an annual maintenance contract. However, for the remaining years of the audit period, the tax was correctly applied. Therefore, this credit was not included in the sample because it was merely an extraordinary item and nonrecurring in nature.
However, in regard to the other credit, the auditor found several invoices from the same vendor within the sample period which indicated that this credit was recurring in nature. Accordingly, this credit was properly included in the sample calculations.
Credit Access Services: Lastly, the Taxpayer contests the assessment of tax to the lease of computer equipment that provides database information via computer terminals.
The department has previously ruled in the enclosed P.D. 91-190 (08/30/91) that leasing of computer equipment in conjunction with the provision of a credit reporting service is not subject to the sales tax. Accordingly, these items will be removed from the audit.
The assessment will be revised as set forth herein. A revised notice of assessment, with interest accrued to date, will shortly be issued. No additional interest will accrue on the outstanding balance provided full payment is made within 30 days.
If you have any questions regarding this matter, you may contact********** the department's
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8812T
Rulings of the Tax Commissioner