Tax Type
Retail Sales and Use Tax
Description
Services; repair and installation; Computer maintenance contract
Topic
Taxability of Persons and Transactions
Date Issued
05-16-1996
May 16, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in response to your letter of January 12, 1996, seeking correction of the use tax assessment issued to************* (the Taxpayer). Copies of all references are enclosed.
FACTS
The Taxpayer is a hospital conducted for profit. An audit for the period July 1994 through April 1995 resulted in the assessment of tax on certain untaxed purchases. The Taxpayer maintains that no tax should apply to charges for: (1) management fees and wages billed under a food service contract, (2) pharmaceuticals, (3) certain used tangible assets purchased in a single transaction, and (4) the portion of a maintenance agreement relating to computer software updates which are furnished via modem.
DETERMINATION
Wages and Management Fees: Although the Taxpayer provides meals to its patients as part of the overall fee paid by the patients during their hospital stay and sells meals at retail to others (staff, employees, visitors, etc.), the Taxpayer has contracted with a food service provider to operate and manage the Taxpayer's food service facilities. The food service provider separately bills the Taxpayer for food, supplies, wages and management fees. In this case, the Taxpayer has been assessed use tax only on that portion of the fees relating to the cost of meals furnished the Taxpayer's patients. The Taxpayer agrees that the tax applies to the food and supplies charged under the contract relating to patient meals but maintains that the wages and management fees relating to patient meals are not taxable.
Although the terms and conditions of the Taxpayer's food service contract may differ slightly from the contracts reviewed by the department in prior rulings [e.g., see PD's 85-202 (10/28/85), 85-214 (12/9/85), 85-216 (12/9/85), and 86-112 (6/25/86)] on similar matters, such rulings clearly set out the general policy that management and other service fees are taxable to the extent related to the provision of food directly to consumers, such as for-profit hospitals and nursing homes who furnish meals to patients as part of their overall services to those patients. As this well established policy is directly on point with the facts of this case, I find no basis to remove the wages and management fees from the Taxpayer's audit.
Pharmaceuticals: The Taxpayer maintains that all medicine which it dispenses to patients pursuant to written prescriptions of licensed physicians should be exempt from the sales and use tax based on Virginia Regulation (VR) 630-10-65(C)(3) which provides, in part, that:
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- Sales of medicines and drugs to hospitals and nursing homes conducted for profit are subject to the tax unless the sales are made as a result of a written prescription of a licensed physician for a particular patient under the care of the hospital or nursing home. (Emphasis added).
Thus, in order for the exemption to apply, the medicines and drugs must be specifically bought for a particular patient pursuant to a written prescription of a licensed physician. In this case, it is my understanding that the Taxpayer makes bulk purchases of medicines and drugs. Although the Taxpayer subsequently dispenses such items from a bulk inventory, the exemption does not apply since the Taxpayer has not purchased the medicines and drugs for a specific patient. The application of the tax in these instances is well founded on the Virginia Supreme Court decision in Commonwealth of Virginia v. Bluefield Sanitarium. Inc., 216 Va. 686, 222 S.E.2d 526 (1976), and set out in prior rulings [e.g., see PD 94-145 (512194)]. Based on all of the foregoing, I find no basis to remove these purchases from the department's audit.
Purchase of Hospital Assets: The Taxpayer maintains that it purchased substantially all of the real and tangible assets of the seller's hospital business in a single transaction and that such purchase should qualify for the occasional sale exemption.
Based on the sales agreement and other information obtained after the audit, it has been shown that the seller owned only one hospital and was a wholly-owned subsidiary corporation, i.e., a separately incorporated business. The documentation also shows that the seller sold or transferred to the Taxpayer all of the seller's title and interest in the real property of the hospital, all tangible fixed assets, all inventories of tangible personal property, all licenses used in connection with the hospital operation, and various other rights and titles.
Code of Virginia § 58.1-609.10(2) provides an exemption from the retail sales and use tax for an "occasional sale." Occasional sale is defined by Code of Virginia § 58.1-602 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 .
Based on the information presented, I find that the contested purchase qualifies for the occasional sale exemption as a sale of substantially all of the assets of a business. As such, this purchase will be removed from the Taxpayer's audit.
Maintenance Agreement: The Taxpayer entered into a single contract to receive computer hardware and software maintenance. Charges for hardware and software maintenance are separately listed in the contract. You request that the department exclude that portion of the maintenance contract related to software maintenance since updates and enhancements are only received via modem.
The application of the sales and use tax to maintenance contracts is set out in VR 630-10-62.1. Under the regulation, contracts which provide both repair or replacement parts and repair labor represent a sale of tangible personal property and are thus subject to the tax based upon their full selling price. The regulation further states that the tax will apply to the total charge for a maintenance contract regardless of the fact that the contract may separately charge for parts and labor.
The contract in question entitles the Taxpayer to receive maintenance for certain computer equipment and software. In the equipment maintenance portion of the contract, the terms and conditions state that the seller "will provide maintenance to keep the Equipment in, or to restore the Equipment to good working order. Maintenance will include lubrication, adjustments and repair or replacement of parts...." Although the software maintenance portion of the agreement may only entail modem delivery of software updates and enhancements, the tax applies to the total charge for the contract since this is a single contract calling for both hardware and software maintenance in which the Taxpayer is entitled to receive hardware repair or replacement parts. Accordingly, the entire charge for the maintenance contract was appropriately held taxable in the department's audit.
Please note that effective January 1, 1996 and thereafter, parts and labor maintenance contracts are taxed on one-half of the total charge of such contracts. For additional information on this law change, see Tax Bulletin 95-8 (9/27/95).
With the removal of contested fixed assets, the balance due is**** . To preclude further interest charges, payment of **** should be sent to the attention of ****of the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, within the next 30 days.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10812R
Rulings of the Tax Commissioner