Were fluorescent-lamp recycling kits taxable retail products when their price included the container, prepaid shipping, and recycling?

Subject

Fluorescent-lamp recycling kits were exempt service transactions

Plain-English summary

Virginia treated the lamp-recycling kit charge as an exempt recycling service, not a taxable sale of a box or bucket. Each kit included a specially sized container, liner, labels, instructions, prepaid return shipping, and recycling for spent mercury-containing lamps.

Customers bought the kits solely to package, ship, and recycle lamps under environmental rules. Because shipping and recycling were included in the price and the container had no separate marketed purpose, the service was the transaction's true object.

The seller still consumed tangible property while providing the exempt service. It had to pay sales tax to suppliers on the kits, labels, liners, and other property, or report consumer use tax if suppliers did not collect it. Any tax already collected from customers had to be refunded to them or remitted to Virginia.

What this means for you

• Bundled property can be incidental when customers primarily seek a regulated service.
• Marketing, required use, prepaid shipping, and included service costs help establish the true object.
• An exempt service provider generally pays tax on property it consumes.
• Collected tax cannot simply be retained; refund it to customers or remit it.

Common questions

Why was the customer charge exempt?

The true object was compliant shipping and recycling of hazardous lamps, not ownership of the container.

Could the seller buy the kits and labels tax-free?

No. The ruling treated the seller as their taxable user and consumer.

What if the seller already collected tax from customers?

It had to refund the tax or remit it to the Department.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-603.
• 23 VAC 10-210-4040 and 23 VAC 10-210-6030.
• 42 U.S.C. § 6901 et seq.; 9 VAC 20-60-10 et seq.
• P.D. 92-13.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-186

Original ruling text

October 17, 2008

Dear *:

This is in response to your, letter requesting exemption from the Retail Sales and Use Tax for a group of recycling kits that are sold by your company, * ("Taxpayer.")

FACTS

The Taxpayer is currently marketing a series of recycling kits. Distributed in the form of cardboard boxes or plastic buckets, these containers are designed to package and ship spent fluorescent and HID lamps to EPA approved recycling centers that are currently located outside of Virginia. The kits vary in size and are specifically designed to package mercury containing lamps. Each recycling kit contains a 6 millimeter poly liner and tie, a prepaid return label, a universal waste label, instructions, and terms and conditions. Taxpayer currently markets these items to commercial and residential users exclusively for the purpose of packaging and shipping mercury containing lamps to recycling centers. The total sales price for these packs include all shipping and recycling fees. Prices range from $20- $1,000 depending upon the size of the container.

The Resource Conservation Recovery Act of 1976 (RCRA) regulates the generation, treatment, storage, transportation and handling of hazardous wastes and provides that spent fluorescent and high intensity discharge lamps are hazardous wastes, and prohibits the disposal of such wastes in a dumpster or compactor. 42 U.S.C. § 6901 et seq . Pursuant to this act, in 1995, the EPA adopted a set of regulations called the Universal Waste Rule that added hazardous waste lamps to the list of universal wastes, which must be either recycled at a licensed facility or treated at a permitted hazardous waste facility. These regulations are incorporated, by reference, into Virginia's Hazardous Wastes Management Regulations, 9 VAC 20­60-10 et seq .

You acknowledge that the containers are tangible products. However, you ask that the Virginia Department of Taxation ("TAX") treat the sale of these products as the sale of a non-taxable service, as the true object of the sale is the provision of a recycling service.

DETERMINATION

Va. Code § 58.1-603 imposes the retail sales and use tax on the sale or rental of tangible personal property. Va. Code § 58.1-602 defines tangible personal property as "personal property which may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses." The provision provides a list of items that are excluded from this definition, including stocks, bonds, notes, insurance or other obligations or securities.

As containers may be seen, weighed, measured, felt, and touched, they fall under the definition of tangible personal property. However, these containers are purchased by consumers for the exclusive purpose of packaging and shipping mercury containing lamps. Consumers package and seal their used lamps in these special containers, which are then shipped to designated recycling centers. The facts indicate that the costs of these containers include all shipping and recycling fees. Therefore, in addition to receiving tangible personal property, the consumer purchasing these recycling kits are purchasing the shipping and recycling services.

Title 23 of the Virginia Administrative Code, § 10-210-4040 provides that for the purposes of determining whether a particular transaction that 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. The regulation further provides:

[I]f 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 ...[i]n instances in which both the services rendered and the property transferred are critical elements of a transaction, the degree of customization, uniqueness or specific services provided in connection with the product shall be considered in determining its appropriate tax status.

In the instant case, the recycling kits are purchased for the sole purpose of providing a means by which mercury containing lamps can be recycled in accordance with EPA standards and regulations. The packages are not marketed for any other purpose. Furthermore, shipping fees and recycling costs are built into the price of the recycling kits. It is clear from these facts that the true object of the transaction is the provision of recycling services. As such, the sale of these recycling kits to the ultimate consumer is exempt from the tax.

This analysis is consistent with Public Document ("PD") 92-13. In that ruling, residents of a locality were required to purchase and use special trash bags in order to have their trash collected. The Tax Commissioner ruled that the true object of the transaction was the actual refuse service provided by the Taxpayer. As such, the sale of the bags was exempt from the tax.

Please note that subsection E of Virginia Administrative Code § 10-210-4040 provides that a service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services. If a supplier fails to collect the tax from a service provider, the provider shall remit use tax to TAX as provided in 23 VAC 10-210-6030. As such, the Taxpayer must pay sales tax to its supplier on the purchase of the recycling kits, labels, and all such other tangible personal property used in providing the exempt recycling service. If your company has been erroneously collecting tax on the sale of the recycling kits, you must refund this tax to your customers or remit it to TAX.

I hope the information provided has addressed your concerns. If you have additional questions, please contact * in the Office of Policy Development at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner