Could a satellite installer buy equipment for resale tax-free when it installed the equipment before transferring it to the programming provider?

Subject

Programming provider is deemed to be a service provider and is subject to the tax

Plain-English summary

Virginia upheld use tax on the installer's equipment purchases and required sales tax on its later transfers to the programming provider. The subcontractor bought satellite equipment from the provider's affiliate under a resale exemption, installed it at subscribers' locations, and then transferred it to the programming provider for dollar-for-dollar reimbursement.

The installer acquired title and possession when it bought the equipment. Installing the equipment was an intervening taxable use before any resale, so the installer could not buy it tax-free for resale. If the affiliate did not collect Virginia sales tax, the installer had to accrue use tax.

Virginia treated the programming provider as a service provider because subscribers' true object was television programming, not the dishes, converter boxes, and remotes accompanying that service. A service provider is the taxable consumer of property used to provide its service. The installer's later transfer of equipment to that provider was therefore a taxable sale on which the installer had to collect sales tax.

What this means for you

• A resale exemption can fail when you install, consume, or otherwise use property before transferring it.
• Reimbursement at cost does not erase a transfer for consideration.
• In a service-provider model, equipment supplied with the service may be taxable to the provider rather than leased taxably to subscribers.
• Map each stage separately: purchase, installation or use, and later transfer.

Common questions

Why did installation trigger use tax?

The installer exercised ownership rights over the equipment before transferring it, creating an intervening taxable use.

Why was the programming provider treated as a service provider?

Virginia found that subscribers primarily wanted satellite programming; the accompanying equipment was not their true object.

Citations and references

• Va. Code § 58.1-602.
• Va. Code § 58.1-604.
• Va. Code § 58.1-623 A.
• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040 A and D.
• P.D. 97-392, P.D. 97-47, and P.D. 87-208.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-71

Original ruling text

May 11, 2011

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period April 2000 through March 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a subcontractor for a satellite television programming provider (the "programming provider"). The Taxpayer installs satellite dish equipment for the programming provider's customers. The Taxpayer purchases the satellite equipment from an affiliate of the programming provider exempt of the tax pursuant to the resale exemption. The Taxpayer maintains that once the equipment is installed, and the customer signs a contract with the programming provider, the equipment is transferred to the programming provider and becomes the property of the programming provider. The Taxpayer states that it is reimbursed by the programming provider, dollar for dollar, for the equipment installed. The Taxpayer maintains that the programming provider charges its customers sales tax on the lease of the equipment.

As a result of the Department's audit, the Taxpayer is contesting the use tax assessed on the satellite equipment purchases. The Taxpayer contends that it is not liable for the tax because ownership of the property rests with the programming provider. To support its position, the Taxpayer provides documentation of its agreement and reimbursement arrangement with the programming provider.

DETERMINATION

Purchase of Equipment by the Taxpayer

Virginia Code § 58.1-602 defines sale, in pertinent part, as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ...."

Virginia Code § 58.1-602 defines use as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business ...."

Virginia Code § 58.1-604 imposes the "a tax upon the use or consumption of tangible personal property in this Commonwealth [Virginia], or the storage of such property outside the Commonwealth for use or consumption in this Commonwealth ...." [Insert added.]

Virginia Code § 58.1-623 A states:

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

The purchase of the satellite equipment from the affiliate by the Taxpayer is a sale as defined in Va. Code § 58.1-602. Title and possession of the equipment passes to the Taxpayer from the affiliate for a consideration. Because of this, the Taxpayer becomes the owner of the equipment upon purchase. When the Taxpayer installs the satellite equipment, the Taxpayer makes a taxable use of the equipment and is thus liable for the tax on the purchase of the equipment. It is the installation of the equipment that triggers a taxable use of the equipment and thus the imposition of the use tax. Therefore, the Taxpayer is unable to purchase the equipment exempt of the tax for resale from the affiliate because the Taxpayer makes an intervening taxable use of the equipment before transferring the equipment to the programming provider. If the affiliate does not charge and collect the Virginia sales tax at the time of the purchase, the Taxpayer is required to accrue the Virginia use tax and remit such tax to the Commonwealth. Accordingly, the assessment is correct as issued.

Transfer of Equipment to the Satellite Provider

Virginia Code § 58.1-609.5 1 states, in pertinent part, the retail sales and use tax does not apply to "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ...."

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A states:

Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable. Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the "true object" test is used to determine the taxability of these transactions.

Title 23 VAC 10-210-4040 D provides:

In order to determine whether a particular transaction which 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. 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.

In Public Document 97-392 (9/29/97), the taxpayer was a satellite television programming provider with customers both within and without Virginia. Relying on Public Documents 97-47 (2/7/97) and 87-208 (9/15/87) 1, , the Tax Commissioner deemed the taxpayer a service provider when it leased, rented or sold equipment in connection with satellite television programming. As such, the taxpayer was not required to charge or collect the tax on such sales. As the provider of a nontaxable service, the taxpayer was subject to the tax on tangible personal property used or consumed in providing its service. This determination applied to the satellite dishes, converter boxes and remote control units provided to the taxpayer's Virginia customers, and to any other tangible personal property (including installation supplies) used or consumed in Virginia by the taxpayer.

Based upon the facts provided, the programming provider is deemed to be a service provider in accordance with Va. Code § 58.1-609.5 and Title 23 VAC 10-210­4040. The true object of the transactions between the programming provider and its subscribers is the satellite television programming. As the provider of a nontaxable service, the programming provider is subject to the tax on tangible personal property used or consumed to provide the service. This applies to satellite dishes, converter boxes and remote control units provided to subscribers. The satellite equipment transferred to the programming provider by the Taxpayer, pursuant to the retailer agreement, is deemed a sale pursuant to Va. Code § 58.1-602 and is subject to the tax upon such transfer. Accordingly, the Taxpayer is required to charge and collect the Virginia sales tax from the programming provider when the equipment at issue is transferred to the programming provider.

CONCLUSION

Based upon this determination, the assessment as issued is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. Please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections, regulation 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,

Craig M. Burns

Tax Commissioner

AR/1-4346216276.P

1. These public documents address the rental of equipment to subscribers by providers of television programming. The Tax Commissioner determined that the true object of the customers was to obtain the television programming services rather than the tangible personal property accompanying the service.