If I rent inflatable party equipment with an attendant, or rent to a church, is the rental exempt from Virginia sales tax?

Plain-English summary

A company that rents party inflatables, tables, games, and other entertainment equipment to Virginia customers was audited and assessed tax on rentals where no sales tax had been collected. The taxpayer raised two defenses: many rentals included an operator or attendant, which it argued made the transaction an exempt service rather than a taxable equipment rental; and many rentals went to churches, which it argued should be tax-exempt.

On the attendant argument, the Department applied the standard "true object test": when a transaction involves both a service and tangible personal property, is the customer really buying a service (with the equipment as an incidental part), or really buying use of the equipment (with any accompanying service as incidental)? Two prior rulings involving nearly identical facts -- inflatable amusement rentals with an attendant present -- had already answered this question: the attendant in those cases was simply monitoring the equipment's safe operation, not applying specialized skills the way, say, a photographer or a caterer would. Because the attendant here played that same monitoring role rather than providing an independent service, the true object of the transaction remained the rental of the inflatable itself, and the whole charge stayed taxable.

On the church exemption, Virginia does exempt certain purchases by qualifying nonprofit churches, but only if the church provides the seller a valid exemption certificate (Form ST-13A) covering that specific category of purchase, or the seller otherwise proves the sale was exempt. The Department noted the taxpayer had no exemption certificates on file at the time of the audit, and only produced some afterward. Even setting that timing issue aside, the Form ST-13A certificate's own wording only covers specific categories, like property used directly in worship services, church administrative and educational spaces, property maintenance, and food/catering for camps and conference centers -- rentals of party games and inflatables to a church don't fall within any of those listed categories. So even with a certificate in hand, these particular rentals wouldn't have qualified, consistent with a prior ruling on similar facts.

The assessment was upheld in full.

What this means for you

Equipment rental businesses that provide an attendant or operator with the rental

Providing someone to babysit or monitor the equipment's safe use doesn't turn a taxable equipment rental into an exempt service. The true object test looks at whether the attendant is applying independent, specialized skills the customer is actually paying for -- simple safety monitoring generally isn't enough to shift the transaction out of the taxable column.

Businesses that rent or sell to churches and other nonprofits

Get a valid, properly completed exemption certificate before the sale, not after an audit starts -- and check that your specific type of transaction is actually covered by the certificate's exact wording. A church's general nonprofit status doesn't make everything you sell or rent to it tax-exempt; the exemption only reaches the specific categories of purchases the statute and certificate describe.

Anyone relying on an exemption certificate obtained after the fact, during an audit

Exemption certificates are strongest when collected at the time of sale. Providing them only after an audit begins raises additional questions, and even a certificate submitted late won't help if the transaction type isn't covered by the certificate's terms in the first place.

Common questions

Q: Does providing an attendant with a rental automatically make the transaction an exempt service in Virginia?
A: No -- the "true object test" looks at whether the attendant is providing an independent, skill-based service the customer is really paying for. Simply monitoring the safe use of rented equipment, without more, keeps the transaction classified as a taxable equipment rental.

Q: Are all sales and rentals to churches exempt from Virginia sales tax?
A: No -- only specific categories of purchases described in Va. Code § 58.1-609.10(16) and the church exemption certificate (Form ST-13A) qualify, and the church must provide the seller a valid certificate covering that exact category; general nonprofit or religious status alone doesn't create a blanket exemption.

Q: Can I provide an exemption certificate after an audit has already started?
A: You can try, but it's much weaker than having one on file at the time of sale, and it won't help at all if the certificate's own terms don't cover the type of transaction being audited.

Citations and references

• Va. Code § 58.1-603 (tax on the lease or rental of tangible personal property)
• Va. Code § 58.1-609.5(1) (exemption for service transactions where sales are an inconsequential element)
• 23 VAC 10-210-4040 (true object test for mixed service/property transactions)
• Va. Code § 58.1-609.10(16) (exemption for certain purchases by nonprofit churches)
• Va. Code § 58.1-623(A) (burden of proving a sale is exempt is on the dealer absent a valid exemption certificate)
• 23 VAC 10-210-280 (exemption certificates must be used in accordance with their exact wording)
• P.D. 04-194 (10/29/2004) and P.D. 06-87 (9/19/2006) (inflatable amusement rentals with an attendant remain taxable equipment rentals)

Subject

Sales Price : Rental of Tangible Personal Property Exemption: Services In Connection With Sale - True Object Test; Certificate - Valid Purchased by Church

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-9

Original ruling text

January 18, 2023

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 October 2015 through May 2019. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer rents party inflatables, tables, games, and other entertainment items to customers in Virginia. As a result of the Department’s audit, the Taxpayer was assessed tax on transactions where inflatables were rented and no tax was collected on the charge. The Taxpayer contends these items should not be taxable as they are rentals with an operator or attendant and many rentals were made to churches.

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 (VAC) 10-210-4040 addresses the application of the tax to service transactions and states, "Charges for services generally are exempt from the sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." The regulation describes the "true object" test used in determining whether a transaction involving both the rendition of services and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The “true object” test 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. 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 (P.D.) 04-194 (10/29/2004) and P.D. 06-87 (9/19/2006), the dealers rented inflatable amusement games such as moonwalks, slides, and obstacle courses. The dealers contended operators were provided and, thus, contested the assessment of tax on the rental of these amusement games. The person provided with the rental of the amusement games was deemed an attendant monitoring the operation and use of the games. For this reason, the true object of the transaction was determined to be the rental of tangible personal property as the attendant did not utilize specific skills required to maintain safety and control over the games.

Church Exemption

Virginia Code § 58.1-609.10 16, provides, in pertinent part, that the retail sales and use tax does not apply to “[t]angible personal property purchased by nonprofit churches that are exempt from taxation under § 501(c)(3) of the Internal Revenue Code, or whose real property is exempt from local taxation pursuant to the provisions of § 58.1-3606.”

Virginia Code § 58.1-623 A provides:

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.

Title 23 VAC 10-210-280 states:

Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.

In order for the exemption related to sales made to a church to apply, the sale must meet one of the criteria listed in Virginia Code § 58.1-609.10 16. Additionally, the church must provide to the Taxpayer a valid exemption certificate or a Department issued nonprofit exemption letter as provided in Virginia Code § 58.1-609.11 in order for the sale to be made exempt of the tax. The Taxpayer did not have exemption certificates on file at the time of audit, but provided several Form ST-13A exemption certificates to the auditor after the fact.

Based on the information provided, the Taxpayer's rentals of games and other property assessed in the audit did not meet the requirements of the exemption certificates. For example, the exemption certificate made available to certain nonprofit churches (Form ST-13A) clearly specifies the type of purchases that may be made exempt of the tax. The exact wording of the certificate outlines exempt tangible personal property, as follows:

Tangible personal property, including prepared meals, catering, and other services related to the provision of food; purchased by churches organized not for profit and which are exempt from taxation under IRC § 501(c)(3) or whose real property is exempt from local taxation pursuant to the provisions of Va. Code § 58.1-3606, for use:

(a) in religious worship services by a congregation or church membership while meeting together in a single location;

(b) in the libraries, offices, meeting or counseling rooms, or other rooms in the public church buildings used in carrying out the work of the church and its related ministries, including kindergarten, elementary, and secondary schools. The exemption for such churches shall also include baptistries, bulletins, programs, newspapers and newsletters which do not contain paid advertising and are used in carrying out the work of the church and gifts, including food, for distribution outside the public church building; and

(c) in (i) caring for or maintaining property owned by the church including, but not limited to, mowing equipment, and (ii) building materials installed by the church and for which the church does not contract with a person or entity to have installed, in the public church buildings used in carrying out the work of the church and its related ministries, including, but not limited to worship services; administrative rooms; and kindergarten, elementary, and secondary schools.

2. Food, including prepared meals, catering, and other services related to the provision of food; disposable serving items; cleaning supplies; and teaching materials used in the operation of camps or conference centers by a church as defined in Item 1 above, or an organization composed of such churches and which are used in carrying out the work of the church or churches.

In addition, the certificate states at the bottom, “NOTE: This exemption certificate does not provide exemption for any tangible personal property purchased by a church other than that specified above.” The Taxpayer’s rentals of games to churches did not fall within the scope of exemption specified on the certificate. This finding is consistent with P.D. 06-87, referenced in the previous section, where a dealer rented similar items to churches with attendants.

CONCLUSION

Based on this determination, the assessment is upheld. 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 60 days of the date of this letter. If the assessment is not paid within the 60-day period collection action may result.

The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3348.C

Related Documents

04-194

06-87