Is a separately stated market-development fee taxable when a vendor passes it through with a sale of materials?

Subject

Market-development fee passed through with materials was taxable

Plain-English summary

Virginia ruled that the separately stated market-development fee was taxable. The vendor paid an independent representative to promote its product to architects and engineers, then passed that service cost to the roof-deck contractor as a line item on material invoices.

The representative's service to the vendor could fall within the exemption for a professional, insurance, or personal service transaction whose sale of property is inconsequential. But once the vendor passed that cost through as part of its material sale, the fee became part of the sales price. Separately stating it did not change the result.

What this means for you

• A vendor expense passed through with a taxable product sale can enter the taxable sales price.
• A separate invoice line does not by itself exempt a service-related charge.
• The vendor was required to collect and remit sales tax on this fee.

Citations and references

• Va. Code §§ 58.1-60a, 58.1-602, and 58.1-609.5(1), as cited in the ruling.
• 23 VAC 10-210-4040.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-55

Original ruling text

May 1, 2009

Re: Ruling Request: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting a ruling on the application of the Retail Sales and Use Tax to "market development fees" paid by * a division of *** (the "Taxpayer"), in connection with the purchase of tangible personal property.

FACTS

The Taxpayer is a roof deck contractor that obtains work by bidding on public projects. The Taxpayer buys materials from specific vendors requested by the project architect or engineer. One such vendor has hired an independent representative to promote its product to architects and engineers. The vendor charges the Taxpayer a "market development fee" as a separate line item on each invoice for materials purchased. Currently, the vendor is collecting Retail Sales and Use Tax on this fee from the Taxpayer.

The Taxpayer requests a ruling regarding the application of the Retail Sales and Use Tax on this "market development fee."

RULING

Va. Code § 58.1-60a imposes a retail sales tax on the "gross sales price of each item or article of tangible personal property when sold at retail or distributed in this Commonwealth." "Sales price" is defined in Va. Code § 58.1-602 as:

the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

Although "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made" are exempt from the Retail Sales and Use Tax under Va. Code § 58.1-609.5(1), this exemption would only apply to the services provided to the vendor by the independent representative. Any pass-through charges for the service to the Taxpayer, even if separately stated, would be considered part of the sales price for which the tangible personal property was sold, and would be subject to the Retail Sales and Use Tax. As stated in the "Services" regulation, 23 Virginia Administrative Code 10-210-4040, any service included in or in connection with the sale of tangible personal property is considered taxable. Accordingly, the vendor is required to collect and remit the Retail Sales and Use Tax on "market development fees."

The Va. Code section cited, along with other reference documents, are available on-line in the Tax Policy Library section of TAX's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

PDO/1-2965879716