Tax Type
Retail Sales and Use Tax
Description
Products provided to customer on trial basis; Repair parts used in maintenance contracts
Topic
Collection of Delinquent Tax
Date Issued
04-12-1999
April 12, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period August 1994 through March 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, located outside Virginia, is a manufacturer of computer equipment, scanners, and software packages. The Taxpayer contests the assessment of tax relating to two issues: (1) products provided to customers on a trial basis, and (2) parts used in connection with the repair of customer-owned products.
DETERMINATION
Products Provided on a Trial Basis
The Taxpayer provides products to customers on a trial basis so that the customers may evaluate the products' technical compliance and compatibility. The customer is issued a "no charge' invoice for the products. The customer has a specified time for evaluation before the products must be returned to the Taxpayer. If the products are returned within the specified time, a credit memo is issued and the products are returned to the Taxpayer's resale inventory. If the products are not returned within the specified time, the customer is billed for the products. You maintain that the provision of products to customers on a trial basis does not represent a taxable use.
Code of Virginia § 58.1-623(C) provides that:
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- If a taxpayer who gives a certificate under this section makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property or service is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale. (Emphasis added.)
In this case, I find that the Taxpayer does not make a taxable use of the products which are provided to customers on a trial basis. The products do not lose their status as resale inventory. The products are either sold to the trial customer or returned to the Taxpayer for resale to other customers.
Further, this determination is consistent with Public Document 88-70 (5/2/88), copy enclosed. In that ruling, the Tax Commissioner determined that products provided to prospective customers were deemed to be used in an exempt demonstration capacity. Accordingly, the department will abate the assessment associated with this issue.
Repair parts
You claim that the auditor based its assessment on documentation used by the Taxpayer to track inventory moved from one location to another. You indicate that the repair parts are shipped from the Taxpayer's out-of-state inventory to the field service technician in Virginia for future use in repairing customer equipment. Upon completion of the repair work on the customer's equipment, the technician completes a field service report summarizing the work performed and indicates if the service call is related to a maintenance contract, warranty or other billable work. Accordingly, you maintain that the contested repair parts are simply moved from one inventory (outside Virginia) to another inventory (within Virginia).
The application of the tax to maintenance contracts and warranty plans is addressed in Title 23 of the Virginia Administrative Code (VAC) 10-210-910. This regulation indicates that the sale of a parts and labor maintenance contract is the taxable sale of tangible personal property. Persons providing maintenance pursuant to parts and labor maintenance contracts may purchase repair or replacement parts exempt of the tax for resale. This same regulation provides that "maintenance contracts which provide only the furnishing of repair labor are contracts for the provision of service only and charges for such contracts are not subject to the tax. Persons providing repair services under such contracts are liable for the tax on all items purchased for use in making repairs.'
Effective January 1, 1996, the taxation of maintenance contracts was amended to exempt from the sales and use tax one-half of the total charge for maintenance contracts when such contracts provide for both repair or replacement parts and repair labor. See the enclosed Virginia Tax Bulletin 95-8.
In this case, the Taxpayer was unable to provide the auditor documentation regarding the use of the contested repair parts. Hence, the auditor could not determine if the Taxpayer makes an exempt use of the parts or if the provision of the parts to customers constitutes a taxable sale. The information you provided with your correspondence shows that certain repair parts are provided under a maintenance contract. As noted above, such parts can be purchased exempt of the tax. However, the auditor was not able to track the contested repair parts to maintenance contracts, warranty work, or other billable work. I agree, however, to give the Taxpayer 45 days to provide documentation regarding the use of such parts.
Finally, I note that subsequent to the audit, the Taxpayer closed its sales and use tax registration; however, the Taxpayer's corporate and withholding registrations remain active. I am concerned that the Taxpayer has sufficient contact with Virginia to require the collection of the tax. In this regard, see Code of Virginia § 58.1-612(C). If you need assistance with this registration issue, please contact the department at the address noted below.
Summary
Revision of the audit assessment will be postponed pending the 45-day period. If additional information is received, it will be given due consideration in the revision of the repair parts issue. If no additional information has been provided regarding the nature of the repair parts, the audit will be revised to remove the "trial basis' issue. The requested information should be sent to ***** Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880.
If you should have any questions concerning this letter, please contact at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18176T
Rulings of the Tax Commissioner