Is a bundled 'unlimited bowling' package taxable just because it includes the option of bowling shoes?

Plain-English summary

A Virginia bowling alley was assessed sales tax on the lump-sum charge for its "Cosmic Bowling" package — unlimited bowling for a set period (usually three hours), with bowling shoes offered as an option. The auditor taxed the whole package because it included shoes (tangible personal property). The alley argued the price is the same whether or not the customer takes the shoes, that most customers bring their own, and that the charge is really for the bowling.

The Tax Commissioner applied Virginia's "true object" test for mixed transactions that combine a service (or intangible entitlement) with tangible personal property. Under Va. Code § 58.1-609.5 1 and 23 VAC 10-210-4040, a bundled charge is either fully taxable or fully exempt, depending on the transaction's true object: if the customer's real objective is the service and the property transferred is not critical, the whole charge is exempt; if the real objective is the property, the whole charge (including any service) is taxable. Here the true object is plainly the bowling activity — the optional shoes are incidental — so the package is not taxable. The tax on the packages was removed from the audit, and the alley (which had already paid) gets a refund with interest.

What this means for you

Businesses that bundle a service with goods

When you sell a single package that mixes an activity or service with a tangible item, Virginia doesn't split the charge — it taxes (or exempts) the entire amount based on what the customer is really buying. Separately stating the goods portion doesn't change the outcome. Ask what the customer's true object is: if it's the experience or service and the goods are a minor, optional add-on, the package can be exempt. If the goods are the point, the whole thing is taxable.

Recreation, entertainment, and activity venues

A right to participate in an activity is generally not a taxable sale of tangible personal property. Bundling optional equipment (here, shoes) into the price doesn't automatically convert an activity charge into a taxable retail sale — but the more essential and substantial the goods become to the deal, the closer it moves toward taxable.

Common questions

Q: What is the "true object" test?
A: It's how Virginia taxes a transaction that mixes a service with tangible personal property. The whole charge is taxable or exempt depending on the customer's real objective — the service, or the property. A single bundled price is not split.

Q: Why wasn't the bowling package taxable even though it included shoes?
A: Because the true object was the bowling activity, not the shoes. The shoes were optional and the price was the same with or without them, so the property was not the point of the transaction.

Q: Does separately listing the goods make them taxable?
A: No. Under the regulation, a mixed transaction is taxed or exempt on the full amount regardless of whether the service and property are separately stated.

Q: Does this ruling apply to my business?
A: Not automatically. It resolves one taxpayer's appeal on its facts. It illustrates the true-object analysis, but your bundle's true object may come out differently.

Citations and references

Statutes and regulations:

• § 58.1-609.5 1 (service transactions involving sales of tangible personal property as inconsequential elements)
• 23 VAC 10-210-4040 (services; subsection A on mixed transactions and subsection D on the "true object" test)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-114

Original ruling text

June 30, 2020

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

Dear *:

This will reply to your letter in which * (the “Taxpayer”) seeks correction of the retail sales and use audit assessment issued for the period August 2013 through September 2016. It is noted that the assessment is paid. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a bowling alley in Virginia. One of the products offered by the Taxpayer is a bowling package called “Cosmic Bowling” (hereinafter “Package”). The Package allows the customer unlimited bowling for a specific period of time, usually three hours. The Package also offers the customer bowling shoes should the customer require them. The auditor assessed the sales tax on the lump sum charges for the Packages because the shoes are offered as part of the Package.

The Taxpayer contests the tax and claims that the majority of its customers bring their own bowling shoes. The Taxpayer contends that the cost for the Package is the same regardless of whether the customer is provided the bowling shoes or brings their own. The Taxpayer argues that the bowling shoes are offered free of charge as an option to the customer, and the charge for the Package represents a charge for the bowling services. For this reason, the Taxpayer requests the tax assessed on the sales of the Packages be removed from the audit.

DETERMINATION

In this instance, the Taxpayer’s Package represents a mixed transaction that offers the elements of a service or intangible entitlement (bowling activity) and tangible personal property (bowling shoes). To address this type of transaction, the Department’s services policy is instructive.

Virginia Code § 58.1-609.5 1 provides that 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 (VAC) 10-210-4040 interprets the exemption statute and states in subsection A that:

Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection the 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 subsection D, the "true object" test is used to determine the taxability of these transactions. Title 23 VAC 10-210-4040 D states:

In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.

The true object test is applicable to the Package at issue. The Taxpayer’s customer seeks to obtain the opportunity to engage in the activity of bowling. While the bowling shoes may be an element of the Package as an option, it is not the true object of the Package transaction. The true object is the bowling activity. Therefore, I find that the sale of the Package is not subject to the sales tax. Accordingly, the audit will be adjusted to remove the tax assessed on the charges for the Packages.

CONCLUSION

In accordance with this determination, the audit will be referred to the appropriate field audit staff for revision. After the revision is completed, the Taxpayer will receive a revised audit report. In addition, a refund of the overpayment as determined by the revised audit liability, plus applicable interest, will be issued to the Taxpayer.

The Code of Virginia and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you should have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1100.T