Were amusement-equipment rentals exempt services when a trained operator stayed with the equipment?

Plain-English summary

Virginia upheld tax on the amusement-equipment rentals even though trained operators accompanied them. The operators made sure equipment was erected and tethered correctly and that height, weight, and participant limits were followed. Virginia found those duties did not require the specialized safety and control skills that had made mechanical-bull and rock-climbing-wall transactions exempt services in an earlier ruling.

The equipment also lacked the sophisticated computer control panels present in those exempt examples. The customers' true object was therefore the rental of tangible personal property, and the total rental transactions were taxable.

The taxpayer said Department personnel had previously guided it to its tax treatment. Virginia refused abatement because the taxpayer supplied no evidence of erroneous written advice issued in response to its own written request, as required by the statute.

Common questions

Q: Does providing an operator make an amusement-equipment rental exempt?
A: Not by itself. This ruling focused on whether the operator needed specialized skills to maintain safety and control, rather than merely attending and enforcing operating limits.

Q: Was claimed oral or undocumented Department guidance enough to cancel the assessment?
A: No. The taxpayer did not prove qualifying written advice that met Va. Code § 58.1-1835.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-609.5(1), and 58.1-1835.
• 23 VAC 10-210-4040(A).
• Virginia Public Documents 04-194, 04-195, 06-87, 07-128, and 11-128.

Subject

Taxpayer failed to charge and collect the retail sales and use tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-65

Original ruling text

April 30, 2012

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

Dear *:

This is in response to the letter submitted on behalf of * (the "Taxpayer") in which your seek correction of the retail sales and use tax assessment issued for the period March 2004 through May 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is in the business of renting amusement equipment to its customers. As a result of the Department's audit, the Taxpayer was assessed tax on the rental of amusement equipment for which the Taxpayer failed to charge and collect the retail sales and use tax. The Taxpayer contests the assessment, maintaining that the true object of the transactions at issue is the service of the operator that operates the equipment for the customer. The Taxpayer further states that it has been applying the tax to these transactions consistent with guidance that was received from Department personnel. The Taxpayer provides documentation regarding the proper operation of some of the amusement equipment at issue.

DETERMINATION

Equipment Rental

Virginia Code § 58.1-603 imposes the sales tax on the lease or rental of tangible personal property in the Commonwealth. The tax is computed on the gross proceeds derived from such lease or rental.

Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for "[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 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." This section goes on to state, "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 ...the true object test is used to determine the taxability of these transactions."

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 also defines sales price, in pertinent part, as "the total amount for which tangible personal property or services are sold, including services that are part of a sale ...."

In Public Documents (P.D.) 04-194 (10/29/04) and 06-87 (9/19/06), the taxpayers rented inflatable amusement games such as moonwalks, slides and obstacle courses. The taxpayers contested the assessment of tax on the rental of these amusement games when an operator was provided. In those instances, the person provided with the rental of the amusement games was deemed to be an attendant who monitored the operation and use of the games. It was determined that the true object of the transactions was for the rental of tangible personal property because the attendant did not exert certain specific skills required to maintain safety and control over the amusement games.

In P.D. 07-128 (8/17/07), the taxpayer provided operators with the rental of its amusement games. The taxpayer presented information that demonstrated that the operators were used when the rented equipment had highly sophisticated computer panels, such as the mechanical bull and rock-climbing wall. It was determined that the taxpayer's rental of the mechanical bull and rock-climbing wall constituted a nontaxable service. Both pieces of equipment required an operator with certain specific skills to maintain safety and control over these amusements during operation.

In this instance, the Taxpayer has not demonstrated that the amusement equipment at issue requires an operator with certain specific skills to maintain safety and control over the amusement equipment during operation. While the amusement equipment at issue does require that a trained operator remain with the equipment while it is being used, the skills required to operate the equipment are not the type of skills considered in P.D. 07-128 that would make the rental of this equipment exempt of the tax. In this instance, there are no specific skills required to operate the amusement equipment at issue other than to make sure the equipment is properly erected and tethered, and the height/weight and maximum number of participant restrictions are met. Additionally, the amusement equipment at issue does not have a highly sophisticated computer control panel like the mechanical bull and rock-climbing wall that were not held taxable in P.D. 07-128. The true object of the transactions at issue is the rental of the amusement equipment to the Taxpayer's customers. Accordingly, the transactions at issue are for the sale of tangible personal property and were properly held taxable in the audit. I find no basis for adjustment to the audit assessment.

Department Guidance

Virginia Code § 58.1-1835 states that Tax Commissioner shall abate any portion of any tax, interest, and penalty attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity if:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

3. The facts of the case described in the written advice and the request therefore are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered. [Emphasis added.]

The Tax Commissioner is authorized to abate an assessment or a portion of an assessment attributable to advice given by the Department, provided the criteria in Va. Code § 58.1-1835 are met. In this instance, the Taxpayer has not provided any evidence to support its claim that the Department furnished erroneous written advice in response to a written request from the Taxpayer. Absent such written proof, it is not possible to conclude that the Taxpayer reasonably relied upon erroneous advice from the Department during the audit period. Accordingly, I am unable to allow an adjustment to the audit assessment based upon this claim. See, P.D. 11-128 (7/6/11), P.D. 06-87 (9/19/06) and P.D. 04-195 (10/24/04).

CONCLUSION

Based upon this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4794014731.P