Could a vending-and-kiosk retailer overturn Virginia use tax by asserting that vending payments were for services and kiosk payments included tax?

Plain-English summary

Virginia upheld use tax on the retailer's vending-machine and kiosk payments because its documentation did not support either claimed exclusion. The taxpayer sold products through vending machines and kiosks. An auditor found account entries for vending-machine and kiosk rentals and assessed use tax after the taxpayer supplied no supporting records.

For the vending machines, the retailer argued that it paid vendors for customized operational services rather than for the rental of tangible personal property. Virginia's true-object test can treat a mixed property-and-service transaction as exempt when the real object is a service and the transferred property is not critical. But the retailer did not produce the information requested during either the audit or appeal, so it failed to establish that the transactions were service purchases.

For the kiosks, the retailer claimed that its payments already included sales tax. The agreements it submitted, however, covered different vendors or transactions from those in the audit. Even after staff identified the mismatch, the retailer did not provide the applicable agreements.

Virginia strictly construed the claimed exemptions and applied the rule that an assessment is presumed correct until the taxpayer proves otherwise. The assessments therefore remained due with interest.

What this means for you

• A true-object argument needs the actual contract and evidence of how the vendor performs the transaction.
• General or unrelated agreements do not prove the tax treatment of audited payments.
• Preserve invoices showing whether sales tax was separately charged or included.
• Once Virginia issues an assessment, the taxpayer bears the burden of proving it wrong.

Common questions

Q: Are vending-machine service arrangements always taxable?
A: The ruling did not decide that broad question. It upheld tax because this taxpayer did not document the claimed service arrangement.

Q: Why did the kiosk agreements fail?
A: They involved vendors or transactions different from those assessed in the audit.

Q: What is the true-object test?
A: It asks whether the customer primarily seeks a service or the tangible property produced or supplied by the transaction.

Q: What was the outcome?
A: The assessments were upheld as issued.

Citations and references

• Va. Code §§ 58.1-205 and 58.1-604.
• 23 VAC 10-210-4040.
• Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973).

Subject

Documentation to support its claims not provided

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-126

Original ruling text

July 3, 2013

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

Dear *:

This reply is in response to your letter in which you request correction of the retail sales and use tax assessments issued to * (the "Taxpayer") for periods from March 2008 through March 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a specialty retailer that sells products from vending machines and kiosks. During the Department's audit, the auditor examined the Taxpayer's Chart of Accounts and noted a line item for the cost of vending machines and kiosk rentals. The Taxpayer did not provide supporting documentation regarding these transactions. Therefore, the auditor assessed the Taxpayer use tax on the payments it made to the vendors of the vending machines and kiosks. The Taxpayer contends its payments to the vendors of the vending machines are for exempt services in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-4040. The Taxpayer also contends that the sales tax is included in its kiosk payments.

DETERMINATION

Virginia Code § 58.1-604 imposes the Virginia use tax on the use or consumption of tangible personal property in this Commonwealth. The use tax is imposed on the cost price of each item or article of tangible personal property used or consumed in the Commonwealth.

Vending Machines

In its appeal, the Taxpayer contends that its payments to the vending machine vendors are for customized and specific services and not the rental of tangible personal property. The Taxpayer states that the nature of the transactions and the day-to-day operation of the vending machines by the vendor support its contentions.

Title 23 VAC 10-210-4040 provides that charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with the sale of tangible personal property are taxable. As explained in subsection D, the "true object" test is used to determine the taxability of these transactions.

Subsection D goes on to state that:

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.

During the audit and this appeal, the Taxpayer was asked to provide documentation to support its claim that it purchased exempt services when making payments for the vending machines. The Taxpayer has failed to provide any information to substantiate its claim. Because the Taxpayer has not presented documentation to support its position that the true object of its transactions is the purchase of exempt services, I find the payments were correctly assessed and there is no basis to adjust the audit.

Kiosks

The Taxpayer presents agreements with the vendors of the kiosks to evidence the inclusion of sales tax in its payments. However, the agreements are not for the same vendors or transactions assessed in the audit. Although the Taxpayer was informed of the discrepancy by a member of my staff, it has not presented the appropriate agreements to support the claim that the sales tax was included in or applied to its payments for the kiosks. As such, the payments were correctly assessed and there is no basis for adjustment.

CONCLUSION

Based on the comments of the auditor and my staff, the Taxpayer has not provided the necessary and appropriate documentation to support its claims that the tax has been erroneously assessed in, this case. The Department has a longstanding policy of strictly construing exemptions against the taxpayer. Exemption from sales and use taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption. See Golden Skillet Corporation v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1973). Moreover, Virginia Code § 58.1-205, provides that any assessment of a tax by the Department shall be deemed prima facie correct. Therefore, it is the Taxpayer's responsibility to prove that the assessment is incorrect. The Taxpayer has not done so in this case.

Based on the foregoing, the assessments are correct as issued. The Taxpayer will receive updated bills with interest accrued to date. The bills should be paid within 30 days from the bill date to avoid additional interest charges. The Taxpayer should remit its payment to Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203. If payment is not received within 30 days of the bill date, collection action will begin.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Law, Rulings and Decisions section of the Department's website. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5112574843.J