The Virginia Tax Commission recently determined that a taxpayer -- the owner of an athletic facility -- was incorrectly assessed sales and use tax on a marketing service that included the transfer of tangible personal property.
Pursuant to relevant Virginia Tax Administrative Code, “Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.”
Taxable
The Virginia Tax Code lists as taxable: “[a]ny services included in or in connection with the sale of tangible personal property.”
Not Taxable
However, “[p]ersonal, professional, or insurance transactions which involve sales as inconsequential elements for which no separate charges are made” are exempt.
Find the True Object
Sometimes, as in the case in question, transactions involve both services and the transfer of tangible personal property. It is not always clear whether the transaction is taxable or not. In these cases, it is necessary to determine the “’true object’ of the transaction.”
According to the Virginia Tax Commission, the taxpayer purchased a marketing consulting package that included the following tangible personal property: a membership survey, DVDs, CDs, booklets, and a DVD player.
The Tax Commission determined:
“Although tangible personal property is included in the purchase price of the package, it is not critical to the transaction…. [T]he true object of the Taxpayer’s purchase is to obtain custom marketing services, not tangible personal property. Therefore, the Taxpayer purchased a nontaxable service from its vendor and is not subject to the sales and use tax on the charge for such service.”
It is fortunate that the taxpayer had kept complete and accurate records of past transactions. Virginia Code § 58.1-633 specifies that “[e]very dealer required to make a return and pay or collect any tax … shall keep and preserve suitable records of sales, leases, or purchases, as the case may be…” The taxpayer’s records enabled the Tax Commission to authorize a refund of sales and use taxes paid, along with refund interest.
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