I rent portable toilets and provide waste removal service with them -- is the whole charge taxable, and can I still get credit for government sales, out-of-state sales, and taxes I already paid, even though I didn't have the paperwork ready during the audit?

Plain-English summary

A company that rents portable toilets and services them (waste removal, etc.) was audited for August 2017 through December 2020 and assessed sales and use tax. It pushed back on five separate points -- one was decided against it outright, two were sent back to the auditor for further review rather than finally resolved, and the penalty was upheld.

The rental-plus-service charge is fully taxable -- the "true object" is the toilet, not the service. Virginia taxes the "gross proceeds" from renting tangible personal property, and "sales price" includes any services that are part of the sale (Va. Code § 58.1-602). When a transaction mixes a taxable rental with services, Virginia applies the "true object" test (23 VAC 10-210-4040 D) to decide whether the whole charge is taxed or exempt -- it's an all-or-nothing question, regardless of whether the service and property portions are billed separately. The Department has treated portable toilet rentals as taxable for more than 30 years (citing P.D. 91-275, P.D. 11-118, and P.D. 13-40), a position the Virginia Supreme Court upheld in LZM Inc. v. Department, 296 Va. 105 (2005). The reasoning: the true object of the transaction is the toilet itself -- the waste removal and other services are merely incidental to providing that equipment. (This is a different application of the same true object test used in the corpus's P.D. 25-14, where the test didn't apply at all because no service was rendered; here, a real service exists but is legally incidental rather than the "true object.")

Government sales: no proof, no exemption. Sales to Virginia or federal government entities are exempt only when made under a required official purchase order paid from public funds (23 VAC 10-210-690). All sales are presumed taxable until the taxpayer proves otherwise (Va. Code § 58.1-623). The taxpayer offered no purchase orders or proof of public-funds payment for its claimed government sales, so that claim failed.

Interstate sales and previously-taxed purchases: sent back to the auditor, not decided. For both the claimed out-of-state deliveries (potentially exempt under Va. Code § 58.1-609.10 4) and the claimed already-taxed purchases, the taxpayer submitted supporting invoices and documentation for the first time with its correction request -- material that wasn't provided during the audit itself. Rather than ruling on the merits here, the Department is sending that documentation back to the audit staff for review. That means these two issues remain open, to be resolved once the auditor examines the new material.

Penalty stands -- the compliance ratios were nowhere close. Virginia's mandatory compliance-ratio penalty applies to audit deficiencies unless a business's compliance ratio, computed by the auditor, meets set thresholds -- 85% for sales tax and 60% for use tax on a second-generation audit (23 VAC 10-210-2032 B). Here, the taxpayer's sales tax compliance ratio was only 9% and its use tax ratio only 46% -- both far short. The taxpayer separately argued the Department's policy on service charges was unclear enough to justify waiving penalty for "reasonable cause" (Va. Code § 58.1-105), but the Department rejected that too: its portable-toilet policy has been "established and consistently applied for well over 30 years."

What happens next. The auditor will review the newly-submitted interstate-sales and untaxed-purchase documentation, may contact the taxpayer to review records further, and will recompute compliance ratios and penalty if the review changes the liability. An updated bill, with interest accrued to date, is due within 60 days to avoid further interest or collection action.

What this means for you

Portable toilet rental (or similar equipment-plus-service) businesses

Don't assume bundling a genuine service with your rental makes any part of the charge exempt. Under the true object test, if the SERVICE is incidental to providing the equipment -- as Virginia has long held for portable toilets -- the whole charge is taxable, separately stated or not.

Any business claiming exempt government or interstate sales in an audit dispute

Have your purchase orders, proof of public-funds payment, and delivery/invoice documentation ready DURING the audit, not just at the correction-request stage. Late documentation isn't necessarily rejected outright, but it gets sent back for auditor review rather than resolved in your favor at the appeal stage -- delaying your outcome.

Businesses hoping to waive penalty for "unclear" Department policy

A reasonable-cause penalty waiver requires a genuinely unsettled or ambiguous area of law. If the Department has published consistent guidance on your exact fact pattern for decades, arguing the law was unclear is unlikely to succeed.

Common questions

Q: I rent equipment and also provide a service with it (cleaning, waste removal, delivery) -- is the whole charge taxable?
A: Generally yes, if the service is incidental to providing the equipment under the "true object" test -- as Virginia has held for portable toilet rentals specifically for more than 30 years, upheld by the Virginia Supreme Court.

Q: I claim I made exempt sales to a government agency -- what do I need to prove it?
A: A required official purchase order, showing the purchase was paid out of public funds (23 VAC 10-210-690). Without that documentation, the sale is presumed taxable.

Q: I have invoices proving some sales were out-of-state or that tax was already paid, but I only found them after the audit -- what happens now?
A: The Department can forward that documentation to the audit staff for review rather than deciding the issue in the ruling itself -- your outcome depends on what the auditor finds on review, not on this ruling alone.

Q: Can I get the compliance penalty waived because the tax treatment of my business type wasn't clear?
A: Only if there's a genuine "reasonable cause" -- and that's hard to show when, as here, the Department has published and consistently applied clear guidance on your exact situation for decades.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-603 -- imposes tax on gross proceeds from the lease or rental of tangible personal property
• Va. Code § 58.1-602 -- defines "gross proceeds" and "sales price," including services that are part of the sale
• 23 VAC 10-210-4040 -- services generally exempt, but taxable when connected to a TPP sale; the "true object" test
• Va. Code § 58.1-623 -- sales presumed taxable until the contrary is established
• 23 VAC 10-210-690 -- government sales exempt only with a required official purchase order paid from public funds
• Va. Code § 58.1-609.10 4 -- interstate delivery exemption
• 23 VAC 10-210-2032 B -- mandatory compliance-ratio penalty; 85%/60% thresholds for a second-generation audit
• Va. Code § 58.1-105 -- Tax Commissioner's authority to waive penalty for reasonable cause

Prior rulings and case law the Department relied on (described here, not linked): P.D. 91-275 (10/28/1991), P.D. 11-118 (6/23/2011), and P.D. 13-40 (3/20/2013) (portable toilet rentals are taxable); LZM Inc. v. Department, 296 Va. 105 (2005) (Virginia Supreme Court upholding that position). A related application of the true object test appears in this corpus's P.D. 25-14, where the test didn't apply at all because no service was rendered -- here, a real service exists but is incidental to the true object (the toilet).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-102

Original ruling text

October 3, 2024

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 August 2017 through December 2020. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a provider of portable toilet rentals and services, was audited for the period at issue and an assessment was issued. The Taxpayer filed an application for correction, contending that the services connected to its rentals of tangible personal property should not be subject to tax. In addition, it claims some of the listed exceptions were for sales made to locations outside of Virginia or to tax exempt government entities. The Taxpayer has also provided some invoices for untaxed purchases listed in the audit for which it asserts tax was paid. Lastly, the Taxpayer requests the abatement of penalties because the Department’s policy with regard to the services is unclear.

DETERMINATION

Services and Rentals of Portable Toilets

The Taxpayer argues the service charge is not the sale of tangible personal property and, therefore, exempt from the retail sales and use tax. Virginia Code § 58.1-603 imposes the sales tax, in part, on “the gross proceeds derived from the lease or rental of tangible personal property . . ..” Virginia Code § 58.1-602 defines "[g]ross proceeds" as “the charges made or voluntary contributions received for the lease or rental of tangible personal property or for furnishing services, computed with the same deductions, where applicable, as for sales price as defined in this section . . ..” This same statute goes onto to define “sales price” as it relates to Virginia’s sales and use tax and provides, in part:

“Sales price” means the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, 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.

As provided above, the term sales price comprises the total amount, including any services that are part of the sale, for which tangible personal property is sold. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 sets out the Department’s policy with respect to the retail sales tax application to services and Subsection A provides “[c]harges 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 Title 23 VAC 10-210-4040 D, the “true object” test is used to determine the taxability of these transactions.

It has been the longstanding policy of the Department to treat the lease or rental of portable toilets as a taxable transaction. See Public Document (P.D.) 91-275 (10/28/1991), P.D. 11-118 (6/23/2011), and P.D. 13-40 (3/20/2013). The Department’s position has also been upheld by the Virginia Supreme Court in LZM Inc. v. Department, 296 Va. 105 (2005).

The ”true object“ of a portable toilet transaction is the provision of tangible personal property. The waste removal and other services provided in a portable toilet transaction are incidental to the provision of the portable toilets. Thus, the auditor correctly included the untaxed service charges as exceptions in the audit.

Government Sales

The Taxpayer also claims that it made sales to tax exempt customers. Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Regarding sales to government entities, Title 23 VAC 10-210-690 states “[s]ales to the United States, or to the Commonwealth of Virginia or its political subdivisions, are exempt from the tax if the purchases are pursuant to required official purchase orders to be paid out of public funds. Sales made without the required purchase orders and not paid for out of public funds are taxable.” The Taxpayer has provided no official purchase orders from any government entity, nor any documentation substantiating that payment for sales to the government entities were from public funds.

Interstate Sales

In its application for correction, the Taxpayer claims that certain exceptions included in the audit should be removed for sales made to customers outside of Virginia. Virginia Code § 58.1-609.10 4 provides an exemption from the retail sales and use tax for the “[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth.”

The Taxpayer provided invoices and documentation related to these exceptions with its application for correction. The submission of documentation shows delivery and service addresses outside of the state of Virginia. Because this documentation was not provided during the audit, it will be forwarded to the audit staff for review.

Untaxed Purchases

In its application for correction, the Taxpayer claims that certain exceptions included in the audit should be removed for purchases in which tax has already been paid. The Taxpayer provided invoices and documentation related to these exceptions with its application for correction. Because this documentation was not provided during the audit, it will be forwarded to the audit staff for review.

Penalty

Title 23 VAC 10-210-2032 B 1 provides for the mandatory application of penalty to audit deficiencies based on the percentage of compliance determined by computing the dealer’s compliance ratio. Under Title 23 VAC 10-210-2032 B 4 penalty will generally be applied unless a dealer’s compliance ratios under a second generation audit meet or exceed 85% for sales tax and 60% for use tax, as computed by the auditor or under the alternative method.

In this second-generation audit, the Taxpayer’s sales tax compliance ratio as computed in the audit is 9% and its use tax compliance ratio is 46%. Accordingly, the compliance penalty was properly assessed in the audit.

Further, Virginia Code § 58.1-105 grants the Tax Commissioner the authority to accept an offer in compromise and to settle claims of disputed or doubtful liability, or doubtful collectibility and to waive penalty for reasonable cause. Contrary to the Taxpayer’s assertion that the Department’s policy regarding portable toilets is not clear, the policy, as cited above, has been established and consistently applied for well over 30 years. Accordingly, an abatement of the compliance penalty is not warranted.

CONCLUSION

Based on this determination, the charges for services made in connection with the Taxpayer’s rental of portable toilets are subject to tax. As a result, this portion of the assessment is upheld.

The documentation submitted with regard to the interstate sales and untaxed purchases will be returned to the auditor for review. In addition, the Taxpayer will be granted an opportunity to provide purchase orders or other official government documents to show it made exempt sales to local county governments. The auditor may also request additional information and will contact the Taxpayer to set up a mutually agreed upon time to review the records. If the review of records results in a revision of the tax liability, the compliance ratios will also be recomputed and the assessment of penalty adjusted accordingly.

After the review of documentation is complete, the auditor will issue an updated bill, with interest accrued to date. The Taxpayer should remit payment of the balance due within 60 days of the date on the updated bill to avoid the accrual of additional interest or possible collection action.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR4200.Z

Related Documents

91-275

11-118

13-40