Were separately charged pumping services taxable when supplied with rented portable toilets, and did the taxpayer prove its claimed rental exemptions?

Plain-English summary

Pumping services for the taxpayer's rented portable toilets were part of the taxable lease even when separately charged. Virginia relied on its longstanding policy and the Virginia Supreme Court's holding that pumping was inextricably tied to using rented portable toilets.

Pumping campers or customer-owned portable toilets was different: because those services were not connected with property rented by the taxpayer, the auditor treated them as nontaxable services. The specific labor exemption for installing, applying, remodeling, or repairing sold property did not cover the taxpayer's pumping.

Virginia accepted transactions backed by valid exemption certificates. It rejected a North Carolina resale certificate where a Virginia Form ST-10 was required, a charity claim where the rental was in an individual's name, and an unsupported exemption claim.

What this means for you

• Separately stating a service does not make it exempt when it is part of a taxable rental.
• Distinguish service to your own rented property from service to customer-owned property.
• Obtain the correct Virginia exemption certificate and registration number.
• Match the purchaser or renter name to the exempt entity.

Citations and references

• Va. Code § 58.1-609.5 1 and 2.
• 23 VAC 10-210-4040 D.
• LZM Inc. v. Department, 269 Va. 105, 606 S.E.2d 797 (2005).
• P.D. 91-275 (Oct. 28, 1991); P.D. 03-67 (Aug. 21, 2003).

Subject

Taxpayer leases or rents portable toilets/separately charged items.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-118

Original ruling text

June 23, 2011

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the audit period April 2007 through March 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer leases or rents portable toilets. The Department's audit disclosed that during the audit period, the Taxpayer charged for pumping services that were not taxed as part of the gross proceeds reported on monthly sales tax returns. The Taxpayer disagrees with the application of the tax to pumping services, contending these services are optional and have been separately charged. Additionally, the Taxpayer rented portable toilets without charging the tax and which were not supported with valid exemption certificates. The Taxpayer has submitted additional documentation stating that the untaxed rentals were treated properly. The Taxpayer seeks a revision of the audit assessment.

DETERMINATION

Pumping Services

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 (10/28/91). In that case, the taxpayer operated a refuse disposal service and expanded its operations to include the leasing and servicing of portable toilets. The Department's audit disclosed that the taxpayer failed to collect the tax on the rental or lease of portable toilets. The taxpayer contended that the portable toilets were incidental to the waste removal services provided and that such services should be treated in the same manner as the taxpayer's refuse disposal operations.

The Department cited the provisions of Virginia Regulation 630-10-97.1(B)(2), currently Title 23 of the Virginia Administrative Code 10-210-4040 D, stating that the true object of the refuse disposal operations was the actual pickup and removal of the refuse from its customers. However, the true object of the taxpayer's portable toilet operation was the provision of the tangible personal property, the portable toilet, not the waste removal pumping services. Customers would have no need for pumping services without the provision of the portable toilets. Accordingly, the pumping services were incidental to the provision of the tangible personal property. The Department's position was upheld by the Virginia Supreme Court in LZM Inc. v. Department , 296 Va. 105, 606 S.E.2d 797 (2005). See P.D. 03-67 (8/21/03).

LZM was in the business of leasing portable toilets. LZM offered pumping services to customers renting or leasing portable toilets. LZM testified that it negotiated the pumping services at the same time the lease agreement was negotiated, stating that such separately stated charges were not part of the rental of the portable toilets. The court held that the pumping services were inextricably tied to the use of portable toilets, and such services were not separate transactions but a part of one transaction, the rental or lease of portable toilets.

In this case, the Taxpayer operates in the same manner as LZM. Based on the cited authorities, the Department's assessment is correct.

The Taxpayer states that there were pumping services performed on campers or customer owned portable toilets. Because these services are not charges in connection with the rental or lease of portable toilets by the Taxpayer, such charges are services as contemplated by Va. Code § 58.1-609.5 1 and are not subject to the tax. The Department's auditor did not hold these transactions taxable.

The Taxpayer also contends that the services at issue are similar to nontaxable charges for labor by automobile dealers who service or repair vehicles that they lease. In such instances, when the labor is separately stated, the charges are not taxable because Va. Code § 58.1-609.5 2 specifically exempts an amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold. The Taxpayer's services are not rendered in installing, applying, remodeling or repairing property that has been sold at retail and, therefore, are not exempt in accordance with Va. Code § 58.1-609.5 2.

Exemption Certificates

*: This customer rented a portable toilet for purposes of re-renting to its customer. The provision of a North Carolina resale exemption certificate is not acceptable. Because the North Carolina customer is renting property in Virginia, it is acting as a dealer leasing or renting tangible personal property in Virginia. Accordingly, the North Carolina customer must provide a Virginia resale certificate of exemption, Form ST-­10, which reflects a valid Virginia sales tax or use tax registration number. A valid ST-10 has not been presented; therefore, the exemption from the tax is not applicable to this particular transaction.

*: The Internal Revenue Service documentation submitted designates the Indian tribes as a public charity. However, the rental is made in the name of an individual, not the Indian tribes. Based on this information, the exemption does not apply and the rental remains taxable.

*: Valid certificates of exemption were submitted for these entities, and the audit has been adjusted to remove these transactions.

*: This is a rental of a portable toilet that was not taxed. The Taxpayer has not presented any documentation supporting its contention that the rental is exempt; therefore, I find no basis for an adjustment.

CONCLUSION

Based on the information presented, the audit has been adjusted for those transactions that have been deemed exempt and supported by the appropriate documentation. Based upon the revision, the Taxpayer should return its payment for the revised assessment amount plus accrued interest totaling * within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: ***. If payment is not received within 30 days, interest will continue to accrue on the balance due from the original date of assessment. Additionally, a 20% amnesty penalty will be applied under the terms of Virginia's Amnesty Program for the amnesty-eligible periods.

If you have any questions regarding this matter, please contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4616754962.Q