Are separately stated programming charges and technician 'trip' charges tied to selling audiovisual equipment taxable?

Plain-English summary

The taxpayer installs and integrates high-end automated home theaters, audio, lighting, and security systems. Its audit assessed sales tax on two separately stated charges: programming (customizing the audiovisual equipment) and trip charges (sending a technician to perform the programming).

Virginia taxes the gross sales price of tangible personal property, including services that are part of the sale (Va. Code Secs. 58.1-603, 58.1-602). For a mix of property and service, 23 VAC 10-210-4040 applies the true object test: if the customer's real objective is the property, related service charges are part of the taxable price, whether or not separately stated.

Programming charges -- taxable. The taxpayer argued the programming was exempt as (1) separately stated installation labor (23 VAC 10-210-4040 C 3) or (2) modification of prewritten programs (C 7), and that the true object was the service. The Commissioner rejected each point:

• Not installation labor -- the taxpayer already charged a separate, untaxed installation charge; the programming is different.
• Not modifying a prewritten program -- the technicians program audiovisual equipment, not a computer or software program (Va. Code Sec. 58.1-602's prewritten-program definition).
• True object is the equipment -- the systems are fully operable without programming, and the programming is 'of no value to customers without the tangible audiovisual equipment.' So the programming is part of the taxable sales price. (Notably, these same services would be exempt if provided without selling equipment.)

Trip charges -- taxable. Virginia exempts separately stated transportation charges for delivery 'from the seller to the purchaser' (Va. Code Sec. 58.1-609.5 3; 23 VAC 10-210-6000). But these trip charges pay for providing a technician to do the programming, not for delivering a product to the customer, so they don't qualify as exempt transportation. Assessment upheld.

What this means for you

AV integrators, custom installers, and similar sellers

When you sell equipment, service charges to make that equipment work -- programming, configuration, customization -- generally fold into the taxable sales price, even if separately stated, because the true object is the equipment. The same labor can be exempt when sold on its own without transferring equipment.

'Installation' vs. 'programming'

Separately stated installation/repair labor on tangible personal property is exempt (23 VAC 10-210-4040 C 3), but don't assume every technician charge qualifies -- programming/customizing the product you sold is not installation.

Trip charges are not automatically 'transportation'

The transportation exemption covers delivering the product to the buyer. A charge for sending a technician to perform taxable services isn't exempt delivery.

Common questions

Weren't the charges optional and separately stated? Yes, but separate statement doesn't control -- the true object test does, and the object here was the taxable AV equipment.

Would the programming ever be exempt? Yes -- when performed without selling equipment, the same service is exempt under the true object test.

Why aren't trip charges exempt transportation? Because they pay to provide a technician, not to deliver the product from seller to purchaser (Va. Code Sec. 58.1-609.5 3; 23 VAC 10-210-6000).

Citations and references

• Va. Code Secs. 58.1-603, 58.1-602 -- imposition of tax; sales price; prewritten-program definition.
• 23 VAC 10-210-4040 -- true object test; exempt separately stated installation (C 3) and prewritten-program modification (C 7).
• Va. Code Sec. 58.1-609.5 3 and 23 VAC 10-210-6000 -- exemption for separately stated transportation/delivery charges.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-94

Original ruling text

June 2, 2020

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

Dear *:

This will reply to your letter submitted on behalf of * (the “Taxpayer”), in which you contest the retail sales and use tax assessment issued for the period July 2014 through June 2017. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates an audio visual, video conferencing and security system business. The Taxpayer installs and integrates high-end custom automated home theaters, speakers, lighting, and security systems for residential and commercial customers. As a result of the Department’s audit, the Taxpayer was assessed sales tax relating to programming and trip charges that were made in connection with the sale of tangible personal property. The programming charges relate to the programming of home video and audio systems. The trip charges relate to charges for technicians for the provision of programming services.

The Taxpayer contests the tax and interest assessed with respect to the programming and trip charges. The Taxpayer contends that the programming charges are not taxable under Title 23 of the Virginia Administrative Code (VAC) 10-210-4040, which addresses the application of sales tax to charges for services provided in connection with sales of tangible personal property. The Taxpayer states that the programming services are optional, separately stated charges for which the true object of the transaction is to purchase a service and not to secure the property which it produces. The Taxpayer also contends that the trip charges are exempt as a separately stated transportation charge.

DETERMINATION

Programming Charges

Virginia Code § 58.1-603 imposes the Virginia retail sales tax upon “every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth….” The tax is computed on the gross sales price of tangible personal property and services that are expressly stated as taxable under Virginia law. “Sales price” is defined in Virginia Code § 58.1-602 as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale…without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.”

Title 23 VAC 10-210-4040 A addresses the application of the tax to mixed transactions and 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 C 3 provides that “[s]eparately stated labor or service charges for the repair installation, application or remodeling of tangible personal property” are exempt services.

In addition, Title 23 VAC 10-210-4040 C 7 provides that “[a]n amount separately charged for labor or services rendered in connection with the modification of prewritten programs as defined in § 58.1-602 …” is an exempt service. Under Virginia Code § 58.1-602, a prewritten program is defined as “a computer program that is prepared, held or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties.”

The Taxpayer provides optional programming services to customize audiovisual equipment purchased by customers. Programming services are separately stated on customer invoices. The Taxpayer states that these services are optional, but customers often prefer to have a trained professional customize and program the equipment. The Taxpayer contends that these charges are (1) exempt as charges for installation and/or as modifications of prewritten programs and (2) the true object of the transaction is to purchase a service.

A sample of the Taxpayer’s invoices shows that the Taxpayer charges a separate installation charge that was properly not taxed in the audit. The programming charges, however, are services to customize audiovisual equipment and are separately stated from the installation charges. The Taxpayer states that the systems are fully operable without a technician performing any programming services.

Based on this information, the programming services are not a separately stated labor or service charge for the repair or installation of tangible personal property. Additionally, the charges are not for the modification of prewritten programs, as the technicians are not modifying a computer or software program. Rather, they are programming audiovisual equipment. Finally, the audiovisual equipment is the true object of the contested transactions. The services provided by the Taxpayer are of no value to customers without the tangible audiovisual equipment. Generally, any charges for labor or services that are related to the sale of audiovisual equipment become part of the taxable sales price. These same services are exempt from the tax pursuant to the true object test when provided without the sale of equipment or other tangible personal property.

Trip Charges

Virginia Code § 58.1-609.5 3 provides a sales and use tax exemption for, "[t]ransportation charges separately stated." Title 23 VAC 10-210-6000 interprets the exemption and states, "[t]he tax does not apply to transportation or delivery charges added to a taxable sale provided such transportation charges are separately stated on the invoice to the customer. If the transportation or delivery charges are not separately stated on the invoice, they will become part of the sales price of the property and will be subject to the tax." The regulation defines transportation and delivery charges as “charges for delivery from the seller to the purchaser.”

The Taxpayer includes a separately stated fee for providing a technician to provide separately stated programming services. The Taxpayer states that these charges are exempt under Title 23 VAC 10-210-4040 C 4, which states that separately stated transportation charges are exempt services. The Taxpayer states that equipment that is delivered is incidental to the provision of the technician service as such equipment could be delivered by common carrier to the customer, but is delivered by the technician for the convenience of the customer. Based on the statute and regulation, these charges do not qualify as exempt transportation or delivery charges. The charges are not for the transportation or delivery of the product to the customer, but rather are for providing a technician to the customer.

CONCLUSION

Based on this determination, the assessment is correct. An updated 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 23203, Richmond, Virginia 23261-7203.

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1666H