When a nail technician sells a customer three custom-molded sets of fingernails and applies one set as part of the visit, is that a taxable sale of nails or a nontaxable personal service, and does the wholesale manufacturer owe tax on its sale to the technician?

Plain-English summary

A wholesale manufacturer of custom-made plastic fingernails ("NAILS") sold molded nail sets to independent nail technicians, who took a mold of each customer's fingers, sent it to the manufacturer, and received back three custom-fitted sets -- one of which the technician typically applied to the customer during the visit (up to two hours of the technician's time), with the other two sets going home unapplied. The technician charged the customer one combined retail price for all three sets plus the technician's services, with services representing as much as a third of the total charge. The manufacturer had gotten conflicting guidance -- one Tax Commission representative reportedly told a technician her work was a nontaxable "service" -- and asked for a definitive answer on who, if anyone, owes sales tax.

The Commission applied the Utah Supreme Court's true-object test from BJ-Titan Services v. Utah State Tax Comm'n, 842 P.2d 822 (Utah 1992), which asks whether the "essence" of a mixed property-and-service transaction is a sale of property or a sale of services, using six factors: (1) the value of the tangible property relative to the services, (2) the seller's cost of the property, (3) the customer's rights to possession/ownership of the property, (4) whether property and service charges can be separately itemized, (5) whether the services increase the property's value (or vice versa), and (6) whether such services are typically rendered in similar transactions.

Applying those factors here:

• The customer buys and takes ownership and possession of three full sets of nails, even though only one is applied during the visit -- indicating the nails themselves, not the service, are the primary purpose.
• The service cost was less than a third of the total price.
• Conclusion: the transaction is primarily for tangible personal property, so it's taxable, and the nail technician must collect and remit sales tax on the entire retail price (including the application service, since it's part of one combined charge).
• Because the retail sale is taxable, the manufacturer's wholesale sale to the technician is not taxable -- NAILS doesn't charge sales tax on the wholesale price and incurs no tax liability itself, as long as it obtains a resale exemption certificate from each nail technician.

What this means for you

Businesses selling a mix of custom property and hands-on service (nail techs, similar personal-service retailers)

Don't assume a hands-on application/fitting service makes the whole transaction nontaxable. Under the true-object test, what you actually deliver to the customer -- ownership of physical goods, versus a service consumed in the moment -- controls. Selling multiple units where only a fraction get "applied" during the visit strongly signals a taxable property sale.

Wholesale/manufacturing suppliers to service providers

If your retail-facing customers are making taxable property sales (per the true-object analysis), your own wholesale sale to them is exempt as a resale -- but you must actually collect a resale exemption certificate to document it; don't rely on an assumption that "we paid sales tax on the raw plastic" substitutes for that certificate (the taxpayer's CPA had incorrectly suggested this).

Accountants classifying mixed goods-and-service revenue

This ruling is a clean, fact-heavy application of the BJ-Titan six-factor test -- useful any time a client sells a bundled good-plus-service charge and needs to determine which side of the line it falls on. Separately itemizing (or not) is only one of six factors, not dispositive by itself.

Common questions

Q: Is a nail technician's charge to a customer for custom nails plus application taxable?
A: Yes, per this ruling, when the customer receives ownership of multiple sets and the service portion is a minority of the price -- the whole combined charge is taxed as a property sale.

Q: Does the wholesale manufacturer of the nails owe sales tax on its sale to the technician?
A: No, per this ruling, as long as the manufacturer obtains a resale exemption certificate from the technician.

Q: Does paying sales tax on raw materials (like the plastic) eliminate the need to tax the finished product?
A: No -- this ruling implicitly rejects that theory (raised by the taxpayer's CPA); the finished-product sale to the end customer is analyzed on its own under the true-object test.

Q: What test does Utah use to decide if a mixed goods-and-service transaction is taxable?
A: The six-factor "true object" test from BJ-Titan Services v. Utah State Tax Comm'n, 842 P.2d 822 (Utah 1992): relative value of property vs. services, the seller's cost, the customer's ownership/possession rights, whether charges are separately itemized, whether one component increases the other's value, and whether such services are typical in similar transactions.

Q: Can another personal-service business with a similar goods-plus-service model rely on this ruling directly?
A: Not automatically -- it applies the true-object test to this specific fact pattern (three sets sold, one applied, service under a third of the price). A different ratio of property to service value could produce a different result.

Citations and references

Case law:

• BJ-Titan Services v. Utah State Tax Comm'n, 842 P.2d 822 (Utah 1992) (establishes the six-factor "true object" test for whether a mixed transaction is primarily a taxable sale of tangible personal property or a nontaxable service)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/00-006.pdf

Original ruling text

00-006

Response March 27, 2000

REQUEST
LETTER

February 5, 2000

Dear Irene,

I was referred to you by NAME of your office to submit
a letter requesting an official opinion on tax questions involving our company.
Apparently we are in a lot of gray areas and no one has been able at this point
to give us a definitive answer.

COMPANY, is a wholesale manufacturer of custom‑made
plastic fingernails. They have sometimes been compared to a product known as
"Lee Press On Nails" (which can be bought at any grocery or variety
store), however the main difference is that ours are custom made using
independent nail technicians who work out of their own salons. The nail
technician takes impressions of the clients fingers, and fashions a model of
how the client wants her fingernails to look.
This model is then sent to our manufacturing facility where the finished
product is made out of plastic. The NAILS are then sent back to the nail technician
to deliver to the client.

We sell the finished product (NAILS), to the nail
technicians at a wholesale price. They then mark up the nails and charge their
clients a retail price that reflects the labor and time involved in making the
model.

I had inquired at the state tax commission previously
about who was suppose to collect the sales tax, because as a company only
selling wholesale, we didn't want to collect it, but wanted to pass that
responsibility onto the retailers. In
order to do this I was told that we needed to require the nail technicians to
give us an exemption certificate.

Here is the confusing issue. One of our new
technicians went to the tax commission and spoke with NAME, who told her that
she didn't have to personally pay, or charge the client sales tax because what she
did was a service. I guess the gray area here is the fact that, the client is
sold 3 sets of nails at the same time. They can choose to have the nails
applied by the nail technician or they can do it themselves at home. At any
rate, only one set can be applied and the other two sets go out the door in a
container and not applied to the person. It should also be noted that this
product is designed to be so user friendly that the customer may elect to have
their nails applied only once and then continue using them on their own without
requiring a nail technician to apply them.

When we asked our CPA about this issue we were told
that if we paid sales tax for the plastic then no one had to pay sales tax on
the finished product. At this point we need an official answer as to whom or if
anyone pays tax on the NAILS. If you need any additional information, you can
reach me at #####. I look forward to
hearing from you as soon as possible.

Sincerely,

NAME

RESPONSE
LETTER

March 27, 2000

RE: Collecting
Sales Tax on NAILS

Dear NAME,

You have requested an advisory opinion concerning the
application of sales tax on custom-made plastic fingernails. From information obtained in your letter and
from recent telephone conversations with you, we understand that your company (ANAILS@) produces
custom-made plastic fingernails and markets them at wholesale to nail
technicians. At issue is whether NAILS
should charge sales tax to the nail technicians on its wholesale price or
whether the nail technicians should charge sales tax to their customers on the
retail price for the nails. To answer
this, we must first determine whether the nail technician is selling his or her
customers tangible personal property, which is taxable, or a service, which is
nontaxable.

To buy these custom nails, a customer must first have
the nail technician take a mold of her fingers. Then, the mold is sent to NAILS, from which is produced three
sets of custom-fitted nails. NAILS
sells the three sets of nails to the nail technician at wholesale. The customer then purchases the three sets
of nails from the nail technician, with the nail technician usually applying
one of the sets of nails to the customer=s
own fingernails. Including the time to
take the mold and apply the one set of nails, the nail technician may spend up
to two hours with a customer. The nail technician=s retail price to the customer is $$$$$, a single price that includes
the three sets of nails and the nail technician=s services. You have informed
us that as much as $$$$$ of the total charge may represent the nail technician=s services.

In, BJ-Titan Services v. Utah State Tax Comm=n, 842 P.2d
822 (Utah 1992), the Utah Supreme Court addressed a sale that included both
tangible personal property and services.
To determine whether services or
tangible personal property had been sold, the Court focused on the nature of
what was sold and whether it primarily entailed tangible personal property. Critical to this analysis was Ato determine if the essence of the transaction is one
for services or for tangible personal property. The analysis typically requires a determination either that the
services provided are merely incidental to an essentially personal property
transaction or that the property provided is

merely incidental to an essentially service
transaction. Since the law imposes a tax only on the sale of tangible personal
property, transactions that are essentially services are not taxable@ while transactions that are primarily for tangible
personal property are taxable. Ibid.

The Court relied on several factors to determine
whether Athe object of the transaction constitutes tangible
personal property or services. These factors include (1) the value of the
tangible property to the customer in relation to that of the services; (2) the
cost of the property to the seller; (3) the customer's rights to possession or
ownership of the property; (4) the ability to separately itemize charges for
the property and services; (5) the extent to which the services increase the
value of the property or to which the property increases the value of the
services; and (6) the extent that such services are rendered in similar
transactions.@ Ibid.

Let us apply these criteria to the sale of the custom
nails at issue here. In so doing, we
find that the customer=s purchase of three sets of nails where only one set
is applied indicates that the nails themselves, not the services, are the
primary purpose of the transaction. In addition,
the customer obtains ownership and possession of the three sets of nails. Also, the cost of the services is, at the
most, less than a third of the total price for the nails. All these facts would indicate that, under
these specific circumstances, the purchase of the custom nails is a transaction
that is primarily for tangible personal property. Accordingly, the transaction is taxable and the nail technician
should collect and remit sales tax on the total retail price of $$$$$. In this situation, NAILS would not charge
sale tax when selling the nails at wholesale to the nail technicians, nor would
it incur tax liability on these transactions as long as it obtained an
exemption certificate indicating that the purchase was for resale.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

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