Tax Type
Retail Sales and Use Tax
Description
True object of transaction
Topic
Taxability of Persons and Transactions
Date Issued
10-08-1997
October 8, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear****************
This is in reply to your letter of June 9, 1997 in which you request a ruling on the application of the Virginia retail sales and use tax to your client, *********** (the “Taxpayer").
FACTS
The Taxpayer is headquartered outside Virginia and will be providing sterilized reusable surgical gowns to profit and nonprofit hospitals in Virginia. The Taxpayer will provide the sterilized gowns to its customers on an as needed basis and charge accordingly. The charge to the customers will include the cost for sterilization and the cost of the gowns. Ownership of the gowns will not transfer to the customers, but will remain with the Taxpayer. The Taxpayer believes it will be providing a service and poses specific questions regarding the application of the tax to its activities in Virginia.
DETERMINATION
Question 1: Under Virginia's tax code, would the Taxpayer be subject to a sales or use tax upon the cost of labor for providing the aforementioned services? Is the Taxpayer responsible for sales and use taxes on the cost of the gowns?
In order to address the application of the tax in this case, we must apply the "true object" test prescribed in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040. The regulation explains that in order to determine whether a Particular transaction involving 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. 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 is taxable.
According to your description of the Taxpayer's activities, the "true object" of the transaction is the furnishing of surgical gowns to hospitals. The provision of the sterilization service without the gowns would serve no purpose to the Taxpayer's customers. The true object of the transaction, in this case, is the provision of tangible personal property.
This position is supported by VAC 10-210-860 which provides the department's policy regarding persons engaged in the linen supply business. The regulation states that "a person engaged in the business of maintaining and preparing textile products for rental or lease is a lessor of tangible personal property and must collect and pay the tax on gross rental receipts."
"Gross proceeds" is defined in Code of Virginia § 58.1-602 as "the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price..." The Code defines "sales price" to mean "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale...without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever". Emphasis added.
The Taxpayer is engaged in the rental of sterilized surgical gowns and is required to compute the tax on gross rental receipts, including labor costs in connection with the provision of gowns to hospitals. Under VAC 10-210-860, the Taxpayer may purchase gowns used exclusively for rental purposes exempt of the tax using Form ST-10.
The above determination is consistent with a prior ruling of the department, Public Document (P.D.) 95-270 (10/24/95). The ruling dealt with a taxpayer that provided a linen service to a private nursing home. The "true object" test was applied and it was determined that the taxpayer was engaged in the provision of tangible personal property. As such, the taxpayer was instructed to collect and pay the tax on gross rental receipts from the rental of the linens. The ruling is on point and the same rationale applies in this case. See also P.D. 96-304 (10/25/97).
Question 2: Does the fact that some customers are nonprofit organizations make a difference to the answer of #1? If so, please explain.
Yes. Code of Virginia § 58.1-609.7(4) provides a sales and use tax exemption for tangible personal property for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home. The Taxpayer is not required to collect the tax on charges to nonprofit hospitals for the provision of gowns. The nonprofit hospitals must provide the Taxpayer a completed Form ST-13 prior to making exempt purchases. Virginia law, however, does not provide a sales and use tax exemption for purchases by for-profit hospitals; therefore, the Taxpayer is required to collect the tax on charges to these customers.
Question 3: Except for income and payroll taxes, are there any other taxes the Taxpayer is responsible to remit to the state of Virginia? If so, please explain.
Enclosed are regulations regarding the Virginia Retail Sales and Use tax, Employer Income Withholding tax, and Corporation Income tax which are administered by the department. Based on the limited information provided, it cannot be determined whether the Taxpayer would be subject to other Virginia taxes. I am enclosing a publication, Virginia Tax Facts, which describes taxes administered by the department and other agencies and provides the appropriate contact information.
I hope the foregoing has responded to your inquiry. In addition to the regulations, I am enclosing copies of the cited statutes, public documents, and exemption certificates for your information. If you have additional questions, you may contact ********at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12792J
Rulings of the Tax Commissioner