Did Virginia treat a children's birthday-party package as a taxable sale of property or an exempt service?

Subject

Retail sales and use tax on sales of children's party package services. THIS PD RESCINDED BY PD 14-1

Plain-English summary

In this now-rescinded ruling, Virginia treated the children's party package as an exempt service. The package combined access to an inflatable-play facility, a private room, coordination and cleanup with pizza, drinks, a T-shirt, invitations, and disposable supplies. Virginia found that the party experience, rather than the included property, was the true object of the transaction.

The taxpayer therefore did not have to collect retail sales tax on the package charge. As the provider of an exempt service, however, it was the taxable user and consumer of the property used to provide the parties. It had to pay sales tax to vendors or accrue use tax on the property's cost price.

The taxpayer had been remitting tax through an internal calculation and asked for a refund. Virginia said a refund depended on proving either that the taxpayer bore the tax itself or that tax collected from customers had been returned to them. Amended returns and supporting records were required, the request was limited to three years from the relevant return due dates, and no refund was warranted if the amount remitted merely equaled the taxpayer's use-tax liability.

The official Virginia page now labels P.D. 11-24 as rescinded by P.D. 14-1. The ruling is therefore useful as history, not current authority.

What this means for you

• Do not rely on this ruling for a current party-package transaction; Virginia marks it rescinded.
• In the historical analysis, the package's true object controlled whether the customer charge was taxable.
• An exempt-service provider could still owe sales or use tax on food, supplies, and other property it consumed.
• A dealer seeking a refund had to prove who bore the tax, file amended returns, and meet the three-year limit.

Common questions

Did every item included in the package become exempt?

No. The package charge was treated as an exempt service, but the provider remained liable for tax on property used to deliver that service.

Did Virginia automatically approve the requested refund?

No. Audit staff first had to verify the taxpayer's calculation and supporting records.

Citations and references

• Va. Code §§ 58.1-609.5(1) and 58.1-625.
• 23 VAC 10-210-4040(A), (D), and (E).
• 23 VAC 10-210-3040, 10-210-6030, and 10-210-6060.
• P.D. 97-84 and P.D. 10-167.
• P.D. 14-1 is identified by the official page as the ruling that rescinded P.D. 11-24.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-24

Original ruling text

February 25, 2011

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you request a ruling on the application of the retail sales and use tax on sales of the Taxpayer's party package services. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer operates as a children's entertainment and amusement center that features air blown inflatables for children. The Taxpayer sells party packages primarily for birthday parties, but also for other special events for children. The parties are two hours long (1 hour, 30 minutes of play time and 30 minutes for pizza and cake). The price includes a private party or meeting room and a party coordinator. The coordinator is responsible for party set-up, greeting the host and guests, coordinating games, pizza and cake time, as well as clean-up and assisting with taking presents and other miscellaneous items to the host's vehicle. The price also includes a slice of pizza and drink for each participant and a t-shirt for the host child. Incidental or 'add-on' purchases (extra pizza, ice cream, balloons, etc.) are taxed according to Virginia law. The brochure provided with the ruling request further indicates that disposable paper plates, cups, napkins, utensils and tablecloths are also provided. Additionally, parties also include full color invitations with party details.

Relying on Public Document (P.D.) 97-84 (2/19/97), the Taxpayer contends the party services it provides are the true object of the transactions. The Taxpayer maintains that the tangible personal property provided is not critical to the transaction. The Taxpayer states it has been remitting tax on the party services to the Department. The Taxpayer requests a ruling regarding whether it should charge the retail sales and use tax on sales of its party package services.

RULING

Application of the Retail Sales and Use Tax

Virginia Code § 58.1-609.5 1 provides the retail sales and use tax does not apply to "[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 10-210-4040 A states, "Charges 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."

Pursuant to Subsection D of Title 23 VAC 10-210-4040, the true object of a transaction must be examined when a transaction involves both the rendering of a service and the provision of tangible personal property.

In P.D. 97-84 (2/19/97), the taxpayer was a destination management company that specialized in conference and event planning services. The taxpayer provided a wide range of products and services, from hotel accommodations and meeting facilities, to tours and food service, for corporate clients. The taxpayer requested a ruling regarding the proper application of the retail sales and use tax on the charges to its clients for these services. The Tax Commissioner ruled the true object of the transactions at issue was the provision of services by the taxpayer to its clients. Accordingly, the taxpayer was a service provider and was not required to collect the tax on charges made to its clients. As a service provider the taxpayer was considered the user and consumer of all products and services provided in planning and developing events for its clients. The ruling in P.D. 97-84 is not applicable in this instance because the facts and circumstances contemplated in the public document are dissimilar to those in the Taxpayer's situation.

In P.D. 10-167 (8/10/10), the taxpayer operated as a nonprofit children's museum. The taxpayer contested the assessment of tax on charges related to its birthday party packages. The birthday party packages at issue offered both service and tangible personal property components. The true object test was applied to determine the correct application of the sales tax to the charges. It was determined that the true object of the transactions was the birthday party experience at the museum. The tangible personal property provided in conjunction with the birthday party packages were elements of the sale, but was not the true object of the transactions. Accordingly, the taxpayer was not liable for the retail sales tax on the sales of the birthday party packages.

Similar to P.D. 10-167, the party package services provided by the Taxpayer are comprised of service and tangible personal property elements. As such, the true object of the transactions must be examined in order to determine the correct application of the retail sales and use tax. Based upon the information provided, the true object of the Taxpayer's party package services is the party experience at the Taxpayer's facility. The tangible personal property provided in conjunction with the party package services is an element of the sale, but is not the true object of the party package transaction. Accordingly, the Taxpayer is not required to charge and collect the retail sales tax on sales of party package services do its customers.

Title 23 VAC 10-210-4040 E states, "A service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services. If a supplier fails to collect the tax from a service provider, the provider shall remit use tax to the department as provided in 23 VAC 10-210-6030." Title 23 VAC 10-210-6060 states, "[t]he use tax is computed on the cost price of tangible personal property."

In this instance, because the sale of the party package services are deemed the sale of an exempt service, the Taxpayer is liable for the tax on purchases of tangible personal property used to provide the party package services. If the Taxpayer's vendor fails to charge and collect the sales tax at the time of purchase, the Taxpayer must accrue and remit the use tax to the Department on the cost price of such property.

Refund

The Taxpayer maintains that it has been remitting the tax on the transactions at issue. The Taxpayer states that a flat fee is charged to the customer, but the tax is not passed to the customer for the service requested. Instead, the assumed tax remittance amount is calculated as an accounting function. The Taxpayer requests a refund of such tax if the transactions are deemed to be for exempt services.

Virginia Code § 58.1-625 states, "Any dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account."

Title 23 VAC 10-210-3040 states:

A dealer may request a refund for taxes erroneously or illegally collected. The dealer must show that the tax erroneously or illegally collected was paid by him and not passed on to the consumer, or the tax was collected from the consumer as tax and subsequently refunded to the consumer. Refunds cannot be authorized unless the request is made within three years from the due date of the return. The amount refunded will be the net amount of state and local tax remitted to the state on the transaction(s) generating the refund. Thus, if a dealer filed a timely return and deducted dealer's discount for the period for which the refund is claimed, the amount of the refund will be reduced by the dealer's discount taken (3% of state tax).

In order to receive a refund, the Taxpayer would need to provide documentation demonstrating that either the tax was paid by the Taxpayer directly, or that the Taxpayer has refunded to its customers the sales tax paid at the time the purchases took place. The Taxpayer would need to file amended returns with the Department as part of the refund process. Refunds are limited to three years from the due date of those returns at issue, and documentation supporting such refund requests must be provided.

Based upon the information provided, the basis upon which the Taxpayer calculated and remitted tax is unclear. If the Taxpayer calculated the tax due based upon the cost price of the tangible personal property utilized in providing the services, a refund would not be warranted as this would equate to its use tax liability as a service provider. Accordingly, the tax basis must be verified by the Department's audit staff before any refund can be issued.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster
Deputy Tax Commissioner

AR/1-4467770159.P

Related Documents

14-1