SALT Report 2292 – The Virginia Tax Commissioner issued a ruling regarding a use tax assessment for a Taxpayer’s purchase of a marketing consulting package. The package included a membership survey, external and internal marketing campaigns, website development and hosting, DVDs, CDs, booklets, and a DVD player.
During a subsequent audit, the auditor determined that an invoice for the marketing package showed that the purchase price included both nontaxable consulting services and tangible personal property. Based on that invoice the auditor issued the use tax assessment. The Taxpayer appealed the assessment and presented a second invoice to support its claim that the price of the marketing package was for services and shipping and handling only.
During the review process the Commissioner referred to Title 23 of the Virginia Administrative Code 10-210-4040 (D) which provides that charges for services are generally exempt from tax except when they are provided in connection with the sale of tangible personal property. Specifically, it states that:
“In order to determine whether a particular transaction which involves 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, including the charge for any services provided, is taxable.”
In this case, the Taxpayer was assessed use tax for its purchase of a marketing consulting package. Although tangible personal property was included in the package’s purchase price, it was not critical to the transaction. Based on the language in the contract, the package was designed to develop a customized marketing strategy that would help the Taxpayer attract and retain new customers. Therefore, the true object of the purchase was to obtain custom marketing services, not tangible personal property.
As a result, the Commissioner determined that the Taxpayer’ purchase met the criteria of the true object test because it was the purchase of a nontaxable service. Therefore, the Taxpayer was found not liable and the Commissioner removed the use tax assessment from the audit.
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