Tax Type
Retail Sales and Use Tax
Description
Status of purchaser as an agent
Topic
Taxability of Persons and Transactions
Date Issued
02-25-1997
February 25, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear******************
This is in reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to a series of transactions being considered by your client (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer owns and operates a worldwide manufacturing business. Currently, the Taxpayer maintains a comprehensive Information Technology Division (the "Division") to support its computer related needs. In providing its services, the Division uses an array of computer equipment including mainframe, mid-range, and personal computers; internally produced and licensed computer software; and other computer related equipment such as printers and scanners. The Division also employs a complete staff of computer programmers, technicians, and end-user support personnel.
The Taxpayer is negotiating the transfer of its entire Information Technology Division to an independent third-party service provider (the "Servicer"). The Taxpayer anticipates entering into a comprehensive information technology services agreement (the "Agreement") with the Servicer, pursuant to which the Servicer will provide the services currently performed by the Division. In providing these services, the Servicer will use most, if not all, of the service personnel, service locations, and information technology assets currently used by the Taxpayer's Information Technology Division.
The Taxpayer seeks a ruling regarding the Virginia sales and use tax consequences of entering into the Agreement with the Servicer. You present four questions for consideration, which will be addressed separately.
RULING
Generally
Code of Virginia § 58.1-602 imposes sales tax upon every person engaged in the business of selling at retail or distributing tangible personal property in Virginia. Sales of tangible personal property are presumed taxable until proven otherwise. Virginia use tax is imposed on the use, consumption, or storage of tangible personal property in Virginia. See Code of Virginia § 58.1-604.
Code of Virginia § 58.1-609.5(1) exempts from the sales and use tax professional and personal service transactions which involve sales as inconsequential elements for which no separate charges are made. In determining whether a particular transaction is for the sale of tangible personal property or the provision of services, the department applies the true object test explained in Virginia Regulation (VR) 630-10-97.1. Under this test, if the true object of the transaction is to secure a service, and the tangible personal property transferred to the customer is not critical to the transaction, then the transaction will constitute an exempt service. On the other hand, if the true object is to secure the property which it produces, then the entire charge, including services provided, will be taxable.
With this background, l will address each of the Taxpayer's questions.
Will the Servicer's monthly charges for computer services provided under the Agreement be subject to Virginia sales and use tax?
A review of the summary outlining the terms of the Agreement between the Taxpayer and the Servicer indicates that the true object of the Agreement is the provision of services. Even though the Servicer is required to purchase supplies and materials necessary to fulfill its contractual obligations, and title to those items may ultimately pass to the Taxpayer, the true object of the Agreement is to obtain computer and technical services provided by the Servicer. As a service provider, the Servicer is the taxable user or consumer of all tangible personal property used in performing its services.
Because the Servicer is providing a service, the monthly charges provided under the Agreement for services will not be subject to the retail sales and use tax. I would note that this ruling is based on the summary of the Agreement; terms or requirements in the actual Agreement which exceed those described in the summary may result in a different ruling.
Does the one-time transfer of title of the Taxpayer's information technology assets to the Servicer qualify as a tax exempt occasional sale?
Code of Virginia § 58.1-609.10(2) provides a sales and use tax exemption for "an occasional sale as defined in § 58.1-602." Code of Virginia § 58.1-602 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 exemption.
Based on the information provided, it appears that the Taxpayer's transfer of assets to the Servicer does not qualify as an exempt occasional sale. The Taxpayer holds a sales tax certificate of registration. No information has been provided to indicate the assets sold are not held or used by the Taxpayer in its registerable activity (manufacturing or wholesale sales). Furthermore, it appears that the Taxpayer has not sold "substantially all the assets" of its business, as your letter indicates that the Taxpayer will retain certain information technology assets.
You cite P.D. 91-142 (7/31/91) to support your position that the transfer of the Taxpayer's information technology assets qualifies as an occasional sale. The factual situation in that case is distinguishable from that described in your ruling request. In P.D. 91-142, it was clear that the fixed assets sold by the taxpayer were not held or used in the activity for which it was required to hold a certificate of registration (selling checks to its customers for use in checking account services). The bulk of the Taxpayer's activities involved services not subject to the sales and use tax. As mentioned above, no information has been provided to indicate the information technology assets sold are not held or used by the Taxpayer in its registerable activity.
The department has ruled that the sale of all or substantially all the assets of a division may qualify as an occasional sale. Under this scenario, the division must be engaged in totally separate and distinct activities based on such considerations as separate books which are separately maintained, separate bank accounts, separation of fixed assets, separation of employees, and the flow of economic advantage from one division of the organization to another. There is no indication that the factors mentioned above are present in the Taxpayer's case.
Based on the information provided, the Taxpayer's transfer of its information technology assets does not qualify for the occasional sale exemption under Code of Virginia § 58.1-609.10(2).
Is the Servicer's receipt of a non-transferable, non-exclusive right to use the Taxpayer's software and equipment a taxable transaction, subject to the Virginia sales and use tax?
Code of Virginia § 58.1-603(2) imposes the sales tax on "the gross proceeds derived from the lease or rental of tangible personal property, where the lease or rental of such property is part of an established business, or the same is incidental or germane to such business." The first issue which must be addressed is whether the transfer of a right to use the Taxpayer's property constitutes a lease.
The term "lease" is defined in Code of Virginia § 58.1-602 to mean "the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without the transfer of the title to such property." You state that the Taxpayer will receive no consideration for granting the Servicer the right to access, operate, and use the Taxpayer's equipment. Based on this information, one of the necessary elements for a lease is not present, and the transaction is not subject to the sales and use tax.
When the Servicer purchases replacement equipment on behalf of the Taxpayer, will the sales tax be imposed on the Servicer or the Taxpayer?
You indicate in your letter that the Servicer will act as the Taxpayer's agent when purchasing replacement equipment. You ask if the Servicer may purchase replacement equipment on behalf of the Taxpayer exempt of the tax as a purchase for resale.
Based upon the guidelines set out by the court in United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), the key factor in making the determination that an agency relationship exists in order to determine who is actually making the purchase is whose credit is bound by the transaction. The information in your letter indicates that the Taxpayer will reimburse the Servicer for the costs of the replacement equipment. The Servicer will be responsible for paying for the equipment. Such a reimbursement arrangement does not appear to bind the credit of the Taxpayer. Therefore, the Servicer is not acting as the agent of the Taxpayer when making purchases of replacement equipment, and the Servicer will be liable for the tax on such purchases.
If a true agency relationship is established in which the Taxpayer's credit is bound on purchases of replacement equipment, and the equipment purchased is not in connection with the furnishing of services, the tax would still be imposed at the time of purchase. However, the Taxpayer, and not the Servicer, would be liable for the tax.
This ruling is based on the facts presented. Any change in facts may render this ruling invalid. If you have any questions regarding this matter, you may contact********* of the department's Office of Tax Policy at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11068F
Rulings of the Tax Commissioner