Tax Type
Retail Sales and Use Tax
Description
Application of sales and use taxes; True object of transaction
Topic
Taxability of Persons and Transactions
Date Issued
11-25-1996
November 25, 1996
Retail Sales & Use Tax
Dear*************
This will reply to your letter in which you request a correction of the department's assessment issued to****** ('the "Taxpayer"), for the period April 1992 through March 1995. I note that the department's assessment has been paid in full. I apologize for the delay in responding to your concerns.
FACTS
The Taxpayer is a software development company which customizes and sells accounting software packages. The Taxpayer also provides training to interested individuals regarding its client's software systems, as well as the marketing of the client's products and systems. The department's audit held taxable the purchase of manuals necessary for the Taxpayer to accomplish the training of individuals purchasing the software of the Taxpayer's client. The Taxpayer contests the taxation of the manuals and states that any value assigned to the manuals is arbitrary.
DETERMINATION
Code of Virginia §58.1-609.5(1) provides that the tax shall not apply to "Professional, insurance, or personal services transactions which involve sales as inconsequential elements for which no separate charges are made...." In determining whether a particular transaction involves the sale of tangible personal property or the provision of an exempt service, Virginia follows the "true object" test. Virginia Regulation (VR) 630-10-97.1 provides the following explanation of this test:
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- if the 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. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable.
I note that the agreement which the Taxpayer has entered into with its client specifically states that the Taxpayer "will exclusively purchase and use current (Client) Training Materials in conducting the (Client's) courses." Since the true object of the transaction is the training, the Taxpayer is the user and consumer of the kits and training materials used in providing the service. Accordingly, l find that the purchases of training materials were properly included in the department's audit. This decision is based on long standing policies of the department, as well as previously issued rulings. I note that the auditor provided the Taxpayer with several copies of these rulings. I have also enclosed copies of previous rulings, P.D. 95-232 (09/13/95) and P.D. 93-232 (12/21/93) relating to the taxation of training materials used in providing services.
The Taxpayer also references a letter from the department in which another company was exempted from the tax on the basis that training manuals and materials were inconsequential to their purchase transactions. In this case, the contracts provided clearly indicate that the manuals and training materials are for use in the provision of training services.
Based on the information before me, l do not find sufficient cause to allow for any adjustment to the department's audit. If you have any questions regarding this matter, please contact *********of the department's Office of Tax Policy at****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9902Q
Rulings of the Tax Commissioner