Can a service provider buy tangible personal property tax-free for resale when the property is only an incidental part of the service it provides?

Plain-English summary

A resale certificate lets a business buy inventory tax-free because it will resell that property and collect tax from its customer. This ruling addresses when a service business may (and may not) use resale treatment for property it hands to the customer as part of the service.

The rule. When a seller is principally engaged in providing services, tangible personal property that is used incidentally in performing the service is not resold in the normal course of business. So the service provider cannot buy that property tax-free for resale -- it is the consumer of the property and owes sales or use tax on it. In addition, the total charge for the service plus any incidentally transferred property is treated as one transaction, even if the service and the property are billed or contracted for separately.

The six-factor "incidental-to-service" test. To decide whether a mixed transaction is principally a service or a sale of property, Nebraska looks objectively at the whole transaction, weighing:

1. the object sought by the buyer;
2. the seller's type of business;
3. whether the property was provided as a retail enterprise with a profit-making motive;
4. whether the property could be sold without the service;
5. the extent the services contributed to the value of the items transferred; and
6. any other relevant factors.

If the service is the principal object, any property transferred is deemed incidental to the service.

Example (data processing). A data processor enters, retrieves, compiles, and maintains information -- nontaxable services -- and may furnish reports, forms, invoices, or statements on paper. Applying the factors, the service is the principal element (customers want the processed information, not the paper; the processor doesn't hold itself out as a seller of paper; the paper has little value without the service). So the processor is the consumer of the statement paper and envelopes and cannot buy them tax-free for resale.

Where else this shows up. The ruling notes the same principle already appears in Nebraska Sales and Use Tax Regulations for various service providers -- hotels/lodgings (Reg-1-046.03), barber and beauty shops (Reg-1-047.01), sewer and water (Reg-1-066.14), veterinarians (Reg-1-078.03), documents (Reg-1-080.03), building cleaning and maintenance (Reg-1-098.07), motor vehicle services (Reg-1-099.04), and pest control (Reg-1-100.05).

What this means for you

Service businesses that hand customers some property

If you are principally a service provider, you generally cannot buy tax-free for resale the property you use incidentally in your service (paper, forms, supplies, materials). Pay tax on those purchases as the consumer, rather than issuing a resale certificate. Don't split the bill to try to convert an incidental transfer into a separate resale -- the whole charge is one transaction.

Businesses that both sell property and perform services

Run the six-factor test on the specific transaction. If the property could stand alone as a retail sale with a profit motive and is what the customer is really buying, it may be a taxable sale of property (potentially eligible for resale purchase). If the service is the principal object, the property is incidental and you are its consumer.

Common questions

Q: Can a service provider ever buy incidental property tax-free for resale?
A: No. When the seller is principally providing services, property used incidentally is not resold in the normal course of business, so it cannot be purchased tax-free for resale; the provider is the consumer and owes tax.

Q: Does billing the property separately change the result?
A: No. The total charged for the service and any incidentally transferred property is treated as one transaction, regardless of whether the two are contracted for separately.

Q: How do I tell a service from a sale of property?
A: Apply the six-factor incidental-to-service test. If the rendition of services is the principal object of the transaction, the property transferred is incidental to the service.

Q: Why is the data processor the consumer of the paper?
A: Customers want the processed information, the processor is not in the business of selling paper, and the paper has little value without the service -- so the service is principal and the paper is incidental.

Citations and references

• Neb. Rev. Stat. § 77-2701.34 and Nebraska Sales and Use Tax Regulation 1-013.01 -- define "sale for resale"; property not resold in the normal course of business cannot be purchased tax-free.
• The six-factor "incidental-to-service" test -- used to determine whether a mixed transaction is principally a service or a sale of tangible personal property.
• Related service-provider regulations -- Reg-1-046.03, 1-047.01, 1-066.14, 1-078.03, 1-080.03, 1-098.07, 1-099.04, and 1-100.05.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr010806.pdf

Original ruling text

Revenue Ruling 01-08-6
Sales and Use Tax

October 31, 2008
TANGIBLE PERSONAL PROPERTY PURCHASED BY A SERVICE PROVIDER
Issue:
Can persons engaged in the business of providing services purchase tangible personal property for resale
when the tangible personal property is provided to the customer as an incidental part of the service?
Conclusion:
When sellers are determined to be principally engaged in the business of providing services, any tangible
personal property used incidentally in providing such services is not resold in the normal course of the
seller’s business and, therefore, cannot be purchased by the service provider tax‑free for resale. In addition,
the total amount charged by the service provider for services and any tangible personal property transferred
incidentally is viewed as one transaction, regardless of the fact the two components may be contracted for
separately.
Analysis:
Neb. Rev. Stat.§77-2701.34 and Nebraska Sales and Use Tax Regulation 1-013.01 define “Sale for Resale”
as a sale of property to any purchaser who is purchasing such property for the purpose of reselling it in the
normal course of his or her business. Property which is resold by the purchaser in the normal course of
his or her business may be purchased tax-free. Property which is not resold by the purchaser in the normal
course of his or her business cannot be purchased tax-free.
In making the determination whether a transaction involving both the performance of a service and the
transfer of tangible personal property is principally the sale of a service, the transaction must be reviewed
using the “incidental-to-service” test outlined below. The “incidental-to-service” test looks objectively at the
entire transaction in determining whether a transaction is principally the provision of a service or the transfer
of tangible personal property. If the rendition of services is the principal object of the transaction, then any
tangible personal property transferred is deemed to be incidental to the services provided. Consideration is
given to the following six factors:

1. The object sought by the buyer;
2. The seller’s type of business;
3. Whether the tangible personal property was provided as a retail enterprise with a profit‑making
   motive;
4. Whether the tangible personal property could be sold without the service;
5. The extent that the services have contributed to the value of the tangible items transferred; and
6. Any other factors relevant to the particular transaction.
   The following example is provided to demonstrate the application of the above factors to the sale of
   services.
   Example:
   Data processors perform nontaxable services such as entering and retrieving information, compiling and
   producing records of transactions, and maintaining information. In the performance of these services the
   data processor may also furnish reports, forms, invoices, or statements to the customer, the customer’s
   clients, or the customer’s cardholders. By applying the above factors to transactions involving the sale

Nebraska Department of Revenue, P.O. Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 01-08-6

October 31, 2008

Page 2 of 2

of data processing services, the service component is deemed to be the principal element based on the
following factors:
Factor #1 – Customers contract with data processors to retrieve and summarize transaction data,
compute balances, and sort and sequence the raw data furnished directly or indirectly by the
customers. The processed information may then be furnished to the customer or the customer’s
clients or cardholders electronically or on paper.
Factor #2 –Data processors are in the business of performing a full range of processing services for
customers and do not hold themselves out to the public as sellers of tangible personal property.
Factor #4 – Without the services provided by the data processors, the printed material has no value
to the customer.
Factor #5 –The statement paper and envelopes transferred have little or no value to the customer.
The value to the customer is in the processed information on the paper.
The weight of the service element in the above factors indicates the transaction is principally for the
provision of a service and any tangible personal property, such as statement paper and envelopes,
furnished with the service is deemed to be incidental to the service. The data processor is the consumer
of the statement paper and envelopes and cannot purchase these items tax-free for resale.
The conclusions of this ruling are also currently addressed in the following Nebraska Sales and Use Tax
Regulations with regard to tangible personal property consumed by various service providers:
Hotels, Lodgings, and Accommodations
Barber and Beauty Shops
Sewer and Water
Veterinarians and Veterinary Medicines
Documents
Building Cleaning and Maintenance
Motor Vehicle Services
Pest Control Services
APPROVED:

Douglas A. Ewald
Tax Commissioner
October 31, 2008

Reg-1-046.03
Reg-1-047.01
Reg-1-066.14
Reg-1-078.03
Reg-1-080.03
Reg-1-098.07
Reg-1-099.04
Reg-1-100.05