Was a computer fee taxable when computers were supplied with online tutorial services, and who owed tax on the computers?

Subject

Tax on computers used in the provision of tutorial services to Virginia students

Plain-English summary

A fee for computers supplied with online tutoring was not taxable to the educational institutions because the true object of the transaction was the tutorial service. The provider placed a computer in each at-risk student's home, used an evaluation to design a custom course, and let the student keep the computer when the course ended.

The computer was convenient but not critical: students could access the same program through any other available computer. That made the electronically delivered tutorial service the transaction's true object, even though the institution's charge included a computer fee.

The provider nevertheless was the taxable user and consumer of the computers used to deliver its service. It had to pay sales tax when buying them or remit Virginia use tax. Virginia also ruled that the provider was not entitled to a refund of taxes it had already remitted.

What this means for you

• A separate property-related fee can remain exempt when the transaction's true object is a service.
• Property that is optional or merely convenient is less likely to control the true-object analysis.
• An exempt service provider generally bears tax on property consumed in providing the service.
• Giving the property to the service recipient later does not necessarily turn the service charge into a taxable retail sale.

Common questions

Why was the computer fee exempt?

The institutions were buying tutorial services, and students could receive those services using another computer.

Who owed tax on the computers?

The tutorial provider, as the user and consumer, owed sales tax at purchase or use tax if sales tax was not paid.

Could the provider recover tax previously remitted?

No.

Citations and references

• 23 VAC 10-210-4040.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-162

Original ruling text

August 6, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request a ruling regarding the sales and use tax liability for computers provided in conjunction with the sale of online tutorial services. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is hired by educational institutions to provide on-line tutorial services to at-risk students. The Taxpayer provides a computer in the student's home to permit access to the on-line learning program. The student uses the computer to take an evaluation exam from which a custom course is designed. When the course is completed, the student is allowed to keep the computer. Although the Taxpayer supplies the computer, the program may also be accessed by using any other computer available to the student.

The computer is supplied at no charge to the student. However, in your letter and during a discussion with a member of my staff, you indicate the amounts charged to the educational institution do include a fee for the computer.

RULING

When a sale is made that includes the rendering of a service and the provision of tangible personal property, the determination of the appropriate tax treatment rests with the true object of the transaction. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 states:

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 .... The object of any transaction which includes the transmittal of information through electronic means . . . is deemed to be a service since the object of the transaction is to obtain the service of electronic information transmittal and the tangible personal property included serves only as the medium for securing the service.

The Taxpayer's standard client contract states, "The Provider [the Taxpayer] will be responsible, regularly, and practically engaged in providing instructional services as described in the SES Provider Service Agreement/Student Learning Plan and possess adequate resources for performing said services." [Insert added.] Based on this language, the true object of the transaction is the purchase of the tutorial services that are transmitted through the computer. The computer is provided as a convenience to the student and is not critical to the transaction as the tutorial may also be accessed from any other computer available to the student.

Although the Taxpayer charges the institution for use of the computer, the fee is not taxable because the true object of the transaction is the tutorial service. In accordance with Title 23 VAC 10-210-4040, as a service provider the Taxpayer is the taxable user and consumer of all tangible personal property purchased for use in the provision of tutorial services to Virginia's students. Therefore, if sales tax is not paid at the time of purchase, the Taxpayer should continue to remit use tax for all computers used in the provision of tutorial services to Virginia students. Furthermore, the Taxpayer is not entitled to a refund of taxes previously remitted.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The cited regulation is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3937696705.M