Tax Type
Retail Sales and Use Tax
Description
Nonprofits, private schools and churches; Sale to nonprofit hospital corporation
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
02-04-1998
February 4, 1998
Dear*****:
This is in response to your letter in which you request a ruling on the proper sales tax application to a variety of sales scenarios.
FACTS
The Taxpayer offers graphic design services for its clients. The Taxpayer sets forth several scenarios regarding the sale of data in several formats, and requests the department's ruling as to the taxable status of each transaction. The Taxpayer also seeks guidance regarding exempt sales to nonprofit organizations and corporations organized and operated to provide services to such nonprofit organizations.
RULING
Prior to any response, I will provide some general information relating to certain subjects.
Services
Code of Virginia Sec. 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. When determining whether a particular transaction involving both the sale of tangible personal property and the provision of a service represents a sale of tangible personal property or an exempt service, the "true object' test is used. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) states "[i]f 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.'
Fabrication
Title 23 VAC 10-210-560 defines fabrication as "[a]n operation which changes the form or state of tangible personal property... A person regularly engaged in the fabrication of tangible personal property for sale at retail must collect and pay the tax on the sales price of the property.' "Sales price' is defined in Code of Virginia ***** Sec. 58.1-602, as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale....'
"Sale' is defined in Code of Virginia Sec. 58.1-602, as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication....'
Questions
1 -5 and 7-10. You raise questions that deal with the provision of information in diskette form. The provision of archive file conversion, artwork manipulation, and photo manipulation described in each scenario is provided to the client via diskette or photo CD. The sale of data in such format represents the sale of tangible personal property. The true object of the transaction in each instance is the diskette or photo CD produced. The data manipulation into diskette or photo CD form is fabrication and would be taxable on the total sales price of the end product, including any charges for manipulation. See enclosed Public Document (P.D.) 92-159 (4/27/92) which further addresses the department's policy regarding the manipulation of data from one form to another.
6. The Taxpayer manipulates data and sends the information to the client via E-mail. The department traditionally has held that transactions involving data access on-line by personal computers are nontaxable service transactions under Code of Virginia Sec. 58.1-609.5(1). This is also true of information sent via fax, Internet, or other electronic means. Intangible property or services generally are exempt from the tax unless provided in connection with the sale of tangible personal property. Because there is no exchange of tangible personal property in this example, the transaction constitutes a nontaxable service transaction. See the enclosed P. D. 95-68 (3/30/95) which details the department's policy with respect to such transactions.
The Taxpayer also questions the applicability of the tax to video cassettes. The video CD may contain training sessions intended for members of a professional service industry or the design of a screen show or contents of a multi-media show for use in a kiosk.
Code of Virginia Sec. 58.1-609.6(6) was added by the 1995 Session of the Virginia General Assembly, and exempts form the tax audiovisual works which are produced for licensure, distribution, commercial exhibition, broadcast, or for use in the production of another exempt work. The department's interpretation of this exemption allows for its application to feature film, program, and documentary producers, audiovisual production companies, and others engaged in the production of tapes for use in the above manner. P.D. 95-198 (7/31/95), copy enclosed. The exemption does not apply to producers of tapes and films not intended for commercial distribution, including in-house training tapes and corporate pieces generally. Accordingly, such sales of video cassettes would be considered taxable
Sales to Nonprofit Hospitals and Nonprofit Hospital Corporations
Code of Virginia Sec. 58.1-609.7(4) exempts "[t]angible personal property for use or consumption by a nonprofit hospital or a nonprofit nursing home.' Title 23 VAC 10-210-720 further provides that the purchases by such hospitals and nursing homes must be paid for out of their own funds.
Code of Virginia Sec. 58.1-609.7(12) provides an exemption for purchases of tangible personal property used and consumed by a nonprofit hospital cooperative or nonprofit hospital corporation organized and operated for the sole purpose of providing services exclusively to nonprofit hospitals. The statute provides that the exemption shall not apply when services of any kind or to any extent are provided to other than nonprofit hospitals.
Questions
1. You ask whether a sale of tangible personal property to a nonprofit hospital is exempt from the tax when the bill is paid by a hospital corporation organized to provide services to the nonprofit hospital.
Code of Virginia Sec. 58.1-609.7(12) sets out certain criteria which must be met in order for the exemption to apply in such an instance. In order for sales to a nonprofit hospital paid for by a nonprofit hospital corporation to qualify for exemption from the tax, the nonprofit hospital corporation must be organized and operated for the sole purpose of providing services exclusively to nonprofit hospitals. The nonprofit hospital corporation should provide the Taxpayer with a properly completed Virginia Certificate of Exemption Form ST-13 indicating that it is exempt from taxation. Absent the certificate of exemption, the nonprofit hospital corporation must pay the tax on such purchases.
2. The Taxpayer questions its responsibility for collecting the sales tax on taxable transactions to a nonprofit hospital corporation in a situation where the nonprofit hospital corporation informs the Taxpayer that it will remit the sales tax directly to the state.
Title 23 VAC 10-210-280(B) provides that "[A]ll sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law....'
Code of Virginia Sec. 58.1-624 sets out the provisions for a direct payment permit. This statute restricts the issuance of direct payment permits to manufactures, mine operators, public service corporations, and those persons who store tangible personal property in Virginia for use both within and outside Virginia.
The hospital corporation does not meet the criteria set out in Code of Virginia Sec. 58.1-624 to qualify for the issuance of a direct pay permit. Thus, the hospital corporation is required to pay the sales tax to a registered dealer on all taxable purchases. Only in a situation where a dealer is not registered to collect the Virginia sales tax would the hospital corporation report the use tax on such taxable purchases. In this case, because the Taxpayer is a registered dealer to collect the Virginia sales tax, the hospital corporation must pay the Taxpayer the sales tax unless it can provide a certificate of exemption indicating that the purchase is exempt from the tax.
I trust the foregoing has answered your concerns. If you have any questions regarding this letter, please contact ***** in the Office of Tax Policy at *****.
Rulings of the Tax Commissioner