Which lost-pet recovery products and service packages were taxable under Virginia sales and use tax?

Subject

Taxpayer offers lost pet recovery products and services for sale.

Plain-English summary

Virginia separated taxable pet-identification products from nontaxable lost-pet recovery services by asking what the customer primarily bought. The company maintained a database linking implanted microchip numbers to pet and owner information and offered online and call-center recovery assistance.

The limited and full service packages were nontaxable services when sold without property. Lump-sum packages that included a microchip, or a microchip plus implantation, were also nontaxable to the customer because the chip was merely a medium for obtaining the recovery service.

Stand-alone sales were different. Microchips packaged with syringes, scanners, and collar tags sold by themselves were taxable retail sales of tangible personal property.

The service exemption did not eliminate tax on the provider's own consumption. Free microchips and microchips included with exempt service packages were taxable uses in Virginia, so the provider owed use tax on their cost price if sales tax had not been paid. A credit could apply for sales or use tax properly paid to another state.

What this means for you

• A database and recovery-assistance subscription can be an exempt service even when an incidental device connects the customer to it.
• Selling the same device by itself is a taxable retail sale.
• Service providers generally pay tax on property they consume in providing an exempt service.
• Package labels do not control; the true object and the role of the property do.

Common questions

Were the limited and full recovery-service fees taxable?

No. They were nontaxable service transactions.

Was a stand-alone microchip sale taxable?

Yes, as were stand-alone scanner and collar-tag sales.

What if the microchip was included in one lump-sum service price?

The customer-facing transaction was a nontaxable service, but the provider owed use tax on the chip's cost when used in Virginia.

Did implantation change the package result?

No. A lump-sum service, chip, and implantation package remained a nontaxable service transaction, with use tax due on the chip.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040(D) and (E).
• 23 VAC 10-210-450.
• Virginia Public Documents 89-170, 97-246, and 98-207.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-210

Original ruling text

September 13, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on the application of the retail sales and use tax to the sale of certain products and services made by * (the "Taxpayer"). I apologize for the delay in this response.

FACTS

The Taxpayer offers lost pet recovery products and services for sale. The Taxpayer sells microchips and scanners to veterinary practices, animal shelters, animal breeders and pet stores. The microchips are implanted under a pet's skin. Each microchip contains an identifying number. If a pet with a microchip becomes lost, a scanner is used to obtain the identifying number associated with the microchip. The Taxpayer maintains a database of pet and owner information for each microchip number. The Taxpayer sells Pet recovery services. These services allow customers access to the database of pet and owner information, which is the medium for reuniting lost pets with their owners. Pet owners can purchase and enroll for the pet recovery services through the Taxpayer's Internet site or phone center. Pet owners can also enroll for the recovery services through participating veterinarians and animal shelters.

The Taxpayer offers two levels of pet recovery services for sale. A "limited" package gives customers Internet access to the database of pet and owner information. Customers also have access to the Taxpayer's call center. The Taxpayer sells a "full" package that includes the services in the limited package and additional services such as lost pet alerts, a medical emergency hotline, pet medical insurance and wallet-sized pet identification cards.

RULING

True Object Test

Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for professional and personal service transactions that involve sales as inconsequential elements for which no separate charges are made. When determining if a particular transaction involving both the sale of tangible personal property and the provision of a service represents a sale of tangible personal property or an exempt service, the "true object" test is used. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 D 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."

Public Document (P.D.) 97-246 (6/2/97) discusses a recovery service that maintained a database of personal possessions and owner information that enabled the finder of a lost or stolen item to report that the item was found. Labels and tags containing the owner's name and a toll-free telephone number to call and report the found item were provided to customers for attachment to registered items. A renewable annual fee was charged for the recovery service. This ruling found that the fees charged for the recovery service were for exempt professional services.

P.D. 98-207 (12/18/98) addresses the sale of personal identification cards for children and others. This ruling concludes that the true object of the transaction was to obtain the identification cards because the taxpayer did not store, maintain and release data on behalf of its customers. The only services provided were those to produce the identification cards. Based on the true object test, the sale of the cards was deemed to be a taxable retail sale. This is in contrast to P.D. 89-170 (5/22/89), in which the Tax Commissioner ruled that charges for a child registration service were for exempt professional services. In this case, customers completed and mailed personal data cards with fingerprints for storage in a database operated by the taxpayer. If a child or other registered person was reported missing, the database information for the missing person was accessed and released to the police.

Based on the information provided by the Taxpayer, the true object test and the cited public documents, the Taxpayer's sale of pet recovery services that do not include the provision to customers of tangible personal property is a nontaxable service transaction. The sale of pet recovery services in which microchips or incidental types of tangible personal property are provided with the service is also a nontaxable service transaction. In these transactions, the true object sought by customers is the pet recovery services. The microchip transferred to customers merely serves as a medium for securing the service. However, bare sales of microchips, scanners and collar tags constitute taxable retail sales as, these items are not provided as part of the Taxpayer's sale of pet recovery services.

Title 23 VAC 10-210-4040 E states that service providers are the taxable users and consumers of all tangible personal property purchased for use in providing exempt services. The Taxpayer is considered the taxable user or consumer of all tangible personal property used in Virginia to provide pet recovery services. If sales tax is not paid at the time of purchase on the microchips or other property provided with the sale of exempt pet recovery services, the Taxpayer is liable for use tax on the cost price of the property used in Virginia.

Products and Services

The proper application of the tax to the products and services listed in the Taxpayer's letter follows.

Microchip Sales

Microchips, which are packaged with single use syringes, are sold to veterinary clinics, animal shelters and pet breeders. This is a taxable retail sale of tangible personal property. Because the microchips are not provided with sales of pet recovery services, the true object of this type of transaction is to obtain the microchips.

Scanner Sales

The Taxpayer sells scanners to veterinary clinics, animal shelters, pet stores and pet breeders. The scanners are not provided with sales of pet recovery services to customers. The scanner sales are taxable retail sales.

Collar Tags

Sales of collar tags on a stand-alone basis are taxable retail sales.

Fee for Limited Pet Recovery Services Only

There is no transfer of tangible personal property to the customer. This is a nontaxable service. The fee for the service is not subject to sale and use tax.

Fee for Full Proactive Pet Recovery Services Only

There is no transfer of tangible personal property to the customer. This is a nontaxable service. The fee for the service is not subject to sales and use tax.

Free Microchips

The Taxpayer's distribution of free microchips in Virginia is a taxable use of the microchips in the state. Virginia use tax is due on the cost price of the microchips used in Virginia. A credit for sales or use tax properly paid on the microchips to another state may apply to the Virginia use tax liability. See Title 23 VAC 10-210-450 for information on credits for sales or use taxes paid to other states.

Lump Sum Fees for Pet Recovery Service and Microchip

As previously stated, pet recovery services that include the provision of microchips are nontaxable service transactions. The microchips are incidental to the transaction. The provision of the microchips to Virginia customers is a taxable use of the microchips in Virginia. See the discussion in "Free Microchips."

Lump Sum Fees for Pet Recovery Service, Microchip and Implantation

These are nontaxable service transactions, as well. The microchips are incidental to the transaction but their use in Virginia is taxable. The microchips provided with these types of services are subject to Virginia use tax. See the discussion in "Free Microchips."

This ruling 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 Code of Virginia section, regulations 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 concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-3190699384.S