Tax Type
Retail Sales and Use Tax
Description
Services; Contract payments
Topic
Taxability of Persons and Transactions
Date Issued
09-17-1996
September 17, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This is in response to ****** letter and your subsequent correspondence seeking correction of a sales and use tax assessment issued to***********(the "Taxpayer"). I note that payment has been made on the uncontested transactions.
FACTS
The Taxpayer was audited for the period November 1989 through December 1993 and was assessed for certain untaxed sales and untaxed purchases. The Taxpayer contests that portion of the assessment in regard to the following three issues: (1) the sale of assets which the Taxpayer maintains were sold under the occasional sale exemption; (2) certain purchases which you indicate were made in connection with the purchase of nontaxable services; and (3) the purchase of fixed assets on which the Taxpayer previously paid the tax.
Each of these three issues will be addressed separately below.
DETERMINATION
Sale of assets: The Taxpayer entered into an agreement to sell assets to a foreign corporation. These assets were owned by the Taxpayer primarily through various operating divisions. The Taxpayer organized a wholly owned subsidiary corporation for purposes of the asset sale. The assets were transferred to the subsidiary in exchange for all the stock of the subsidiary under Internal Revenue Code (I.R.C.) § 351. Subsequently, the foreign corporation acquired all the stock of the subsidiary through a qualified stock purchase election pursuant to I.R.C. § 338(h)(10).
Code of Virginia § 58.1-609.10(2) provides an exemption from the tax for an "occasional sale" as defined in § 58.1-602. That section defines an "occasional sale" as:
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- A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration. (Emphasis added)
In Public Document 95-79 (4/12/95), the department determined that an I.R.C. § 351 tax-exempt reorganization of assets is a qualifying "reorganization" for purposes of the occasional sale exemption. Furthermore, the department set out in Public Document 94-106 (4/8/94) that it considers an I.R.C. § 338(h)(10) election to be the sale of intangible personal property and exempt for sales and use tax purposes.
Accordingly, the Taxpayer's transfer of assets to its wholly owned subsidiary and the subsequent sale of the subsidiary's stock to the foreign corporation are exempt from sales and use taxation. The sale of these assets will therefore be removed from the assessment.
Purchase of services: The Taxpayer and an unrelated provider entered into a contract for the provision of certain activities. Prior to the contract, these activities were performed internally by the Taxpayer. Under the terms of the contract, the Taxpayer leases some property from the provider, and that property is used by the Taxpayer's personnel at the Taxpayer's facilities. The Taxpayer maintains, however, that all payments made by the Taxpayer relate to the provision of services.
In connection with mixed transactions, Virginia Regulation 630-10-97.1 provides that:
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- 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.
The regulation goes on to explain that if the true object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. Conversely, if the true object of the transaction is for the sale of tangible personal property, then the entire charge is taxable.
I have reviewed the contract which pertains to the contested purchases and find that the true object of that contract is for the provision of data processing, information services, telecommunication services, and computer maintenance and support. I find that the true object of the Taxpayer's contract with the provider is to secure services. Accordingly, the purchases related to the contract will be removed from the assessment.
Asset purchases: The Taxpayer was assessed on the purchase of fixed assets. You have provided documents with your correspondence indicating that the tax was paid on some of these assets and that certain others are exempt from taxation.
The documents you provided have been forwarded to the department's audit staff for review. Based on their findings, they will make revisions to the assessment as warranted.
Summary: The assessment will immediately be revised to remove the sale of assets which have been found to be part of an exempt occasional sale and to remove those purchases which were made under the Taxpayer's service contract. The assessment will be further revised, as warranted, based on a review of the documents you provided relating to the purchase of fixed assets.
If you have any additional questions regarding these issues, please contact *********** in my Office of Tax Policy at **********..
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/105751
Rulings of the Tax Commissioner