Were mechanical-bull and climbing-wall rentals taxable when skilled operators kept control, and did the same apply to games needing only attendants?

Subject

Rental of the mechanical bull and the rock-climbing wall are exempt.

Plain-English summary

Virginia removed mechanical-bull and rock-climbing-wall rentals from the assessment because skilled operators controlled those amusements, making the true object a service. Other amusement-game rentals remained taxable when attendants merely monitored use.

The specialized equipment used sophisticated control panels and required trained operators to maintain safety and control throughout operation. Virginia compared that arrangement with crane rental including an operator, where the customer primarily obtained the operator's skill.

The business still had to pay tax when purchasing the bull, wall, and items used to provide the service. Virginia also left its prior decisions on exemption certificates and Department advice unchanged.

What this means for you

• The operator must exercise specialized skill and retain control; a safety attendant alone may not be enough.
• Document training, control duties, safety responsibility, and customer access to the controls.
• A nontaxable operated service makes the provider the taxable consumer of the equipment.
• Analyze each amusement separately rather than applying one treatment to all rentals.

Common questions

Were all amusement rentals exempt? No. Only the mechanical bull and climbing wall received the service treatment.

Why did they qualify? Skilled operators maintained safety and complete operating control.

Did the provider buy the equipment tax-free? No. The ruling says the service provider owed tax on the equipment and service supplies.

Citations and references

• 23 VAC 10-210-4040.
• P.D. 01-56 (May 14, 2001) and P.D. 91-19 (February 21, 1991).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-128

Original ruling text

August 17, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek reconsideration of the Department's prior determination issued to * (the "Taxpayer") regarding the assessment issued for the period July 1999 through May 2005. I apologize for the delay in responding to your letter.

FACTS

In the Department's prior letter, it was determined that the retail sales and use tax was applicable to the Taxpayer's rental of amusement games in accordance with Public Document 01-56 (5/14/01). Based on the facts presented at that time, the Department found no basis to conclude that the Taxpayer's rentals of amusement games included an operator as opposed to an attendant.

The Taxpayer disagrees with the Department's position on the basis that when the amusement games are rented they include an operator who is skilled at operating the game. The Taxpayer has presented additional facts in support of its request for reconsideration. The Taxpayer also asks for a reconsideration of the decisions regarding exemption certificates and advice received from the Department.

DETERMINATION

Operator versus Attendant

The Taxpayer contends that operators are utilized for certain equipment with highly sophisticated computer control panels such as the mechanical bull and the rock-climbing wall. The Taxpayer states that this equipment requires a well-trained operator to use. The Taxpayer asserts that, based on the Department's policy, such rentals with an operator would be exempt from the tax.

After careful consideration, I find that the Taxpayer's rentals of the mechanical bull and rock-climbing wall constitute a nontaxable service. The mechanical bull and rock-climbing wall require an operator with certain skills to maintain safety and control over these amusements during their operation. This is similar to other instances in which the Department has determined that the rental of equipment with an operator constitutes a nontaxable service. See, for example, Public Document (P.D.) 91-19 (2/21/91), which addresses crane rental with and without an operator. The Tax Commissioner determined that a crane rented with an operator is considered a nontaxable service because the "true object" of the transaction is to obtain the operator's skills in using the crane. The operator exerts certain skills and maintains complete control over the crane during its operation. The same analysis holds true for the Taxpayer's rental of the mechanical bull and rock-climbing wall.

Therefore, the Taxpayer's rental of the mechanical bull and the rock-climbing wall are exempt from the retail sales and use tax. The charges for the rentals of the mechanical bull and rock-climbing wall will be removed from the audit. You should note that as the provider of a nontaxable service, the Taxpayer must pay tax on the purchase of these amusement games and any items used in the rendition of the service. See Title 23 of the Virginia Administrative Code 10-210-4040.

The remaining items the Taxpayer rents as part of its operation are taxable. The remaining items require the use of an attendant to monitor the operation and use of the game but do not require the same level of specialized skill as the mechanical bull and rock-climbing wall in their operation.

Other Issues

After careful review of my September 19, 2006, letter and the information provided in your letter, I find no basis to change my determination relating to the exemption certificates and advice received from the Department.

CONCLUSION

Based on this determination, the mechanical bull and rock-climbing wall rental transactions will be removed from the assessment. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the assessment is paid within 30 days from the date of the updated bill. If you would like to establish a payment plan with the Department's Collections Unit, you may contact a representative of the Collections Unit at (804) 367-8045. You should note that interest would continue to accrue on the outstanding balance of the assessment during the term of the payment plan.

The regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1123491669.i