Were laser access, computer training, and patient-billing charges taxable for two Virginia vision businesses?

Subject

Medical practice that performs visual correction surgery/sells contact lenses and eyeglasses

Plain-English summary

Virginia treated the refractive-laser agreement as a taxable equipment rental, not an operated-equipment service. Vendor personnel assisted and monitored the equipment, but the practice's physician directed the laser beam and retained ultimate control during surgery.

Computer training billed to both taxpayers was also taxable. Although separately invoiced, the training appeared in the sales agreements and payment schedules and was required in connection with the hardware and software purchases. Separately excluded installation labor and freight were not taxed.

The patient-billing transactions were different. The vendor processed electronic data and produced unique statements for each patient or insurer, so the true object was an exempt data-manipulation and billing service. Those charges were removed from the audit.

What this means for you

• Equipment supplied with assistants can still be a taxable rental when the customer controls and operates it.
• Separate invoicing does not make training exempt if the underlying sales agreement requires it.
• Customized billing output can be incidental to an exempt information-processing service.
• Contract language and actual control of equipment determine the true object.

Common questions

Q: Why was the laser agreement taxable?
A: The physician, not the vendor's personnel, ultimately operated and controlled the laser during treatment.

Q: Why was separately billed training taxable?
A: It was included in the sales agreements and formed part of the computer-equipment purchases.

Q: Why were patient statements exempt?
A: Each statement was uniquely generated through data manipulation, making the true object a service.

Citations and references

• 23 VAC 10-210-4040 D.
• Va. Code §§ 58.1-602 and 58.1-609.5 2 and 3.
• P.D. 97-65 and P.D. 96-88.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-128

Original ruling text

July 29, 2008

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessments issued to * ("Taxpayer 1") and *** ("Taxpayer 2") as a result of an audit for the periods July 2004 through April 2007 and August 2004 through March 2007, respectively.

FACTS

Taxpayer 1 is a medical practice that performs visual correction surgery. Taxpayer 2 sells contact lenses and eyeglasses. Taxpayer 1 contests the tax assessed on charges for a rental agreement that it contends is for services, i.e. , a rental with operators. Taxpayer 1 also contests the tax assessed on printing charges that it contends are exempt billing services. Both taxpayers contest the tax assessed on training charges billed in connection with the purchase of computer equipment. They contend that the training is exempt because it was separately invoiced and was optional.

DETERMINATION

Title 23 of the Virginia Administrative Code 10-210-4040 D is used to determine the "true object" of a transaction that includes both the sale of tangible personal property and the provision of services:

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.

Laser Equipment

Section 2.4 of the refractive laser access agreement provides that for the time that the vendor is providing its equipment on a periodic basis, the vendor will employ and provide fully trained and appropriately certified personnel necessary to assist Taxpayer 1 in the operation of the laser and other refractive equipment provided by the vendor. Pursuant to Section 2.1 of the agreement, the vendor is also to perform all maintenance and repair of the refractive laser and other refractive equipment. Of further importance is Section 3.4 of the agreement, which places the responsibility upon Taxpayer 1 for administering refractive laser treatments in a professional manner. Furthermore, Section 3.8 of the agreement specifically states that Taxpayer 1 is to use the laser in strict compliance with all instructions provided by the vendor of the equipment. This contract language strongly suggests that the physician of Taxpayer 1, not the vendor's personnel, operates the equipment.

Notwithstanding the assistance needed in monitoring the laser equipment while it is being operated, it is the designated physician of Taxpayer 1 that directs the beam from the laser into the patient's cornea to perform corrective vision surgery. As such, the provision of assistants is secondary to the provision of equipment, which is under the ultimate control and operation of the attending physician while performing the corrective vision surgery. Accordingly, I find that the true object of the agreement constitutes the taxable rental of equipment to Taxpayer 1.

Training

Virginia Code § 58.1-602 defines the term "sales price" to mean "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . ." Cost price is computed in the same manner as sales price.

To support the claim that the training fee at issue is optional and billed separately, you refer to Section 13.4 of a hardware and software sales agreement that requires the vendor to furnish software training sessions only if training is included in this Agreement. The fees for required training services are listed in Schedule A of the agreement. The sales agreement also allows for additional training beyond that listed in the agreement but it is to be billed separately at the then current rates.

While you refer to the training fees as charges for additional training, the invoice presented to Taxpayer 1 is a billing for six training units, as well as hardware and maintenance. Because the training fee is listed in Schedule A of the agreement, it is a requirement of the sale in accordance with Section 13.4 of the agreement. For these reasons, I must conclude that this training is sold in connection with the sale of tangible personal property. Thus, the total amount charged, including charges for training, makes up the cost price of the tangible personal property subject to taxation. In the absence of any statutory exclusion for training services sold in connection with the purchase of tangible personal property, these training charges are taxable. I would note that the installation labor and freight charges are not taxed because such services are specifically excluded from taxation by Va. Code § 58.1-609.5 2 and 3.

As for the training charge billed to Taxpayer 2, the invoice shows a billing for one "additional day" of training without any other charges. Although this charge is for additional training, it is included in the payment terms listed in Schedule A of the sales agreement and thus does not constitute training beyond that listed in the original sales agreement. Although invoiced separately from the initial training billed two months previously, this training service charge is part of the taxable sale of computer equipment. Accordingly, this charge will remain in the audit.

Patients Billing Statements

Taxpayer 1 contracted with a billing service to process electronic billing information received from Taxpayer 1 and then print and mail bills, to patients or the insurance companies of patients. In Public Document (P.D.) 97-65 (2/13/97), the true object of data manipulation was deemed an exempt service because each billing document was rendered unique for each recipient. Also see P.D. 96-88 (5/14/96). For this reason, I find that the billing transactions at issue constitute the provision of exempt services. Accordingly, these transactions will be removed from the audit of Taxpayer 1.

CONCLUSION

The assessments will be revised in accordance with this determination. Because the assessments have been paid, the appropriate refunds will be issued to Taxpayers 1 and 2. The refunds will include refund interest from the date of payment.

The Code of Virginia sections, regulations and public documents cited 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 Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1962950261.R