Title: LZM, Inc. v. Virginia Dept. of Taxation
Citation: N/A
Docket Number: 040779
State: Virginia
Issuer: Virginia Supreme Court
Date: January 14, 2005

PRESENT: All the Justices 
 
LZM, INC. 
 
 
 
              OPINION BY 
v.  Record No. 040779                      JUSTICE G. STEVEN AGEE 
 
               January 14, 2005 
VIRGINIA DEPARTMENT OF TAXATION 
 
 
FROM THE CIRCUIT COURT OF MONTGOMERY COUNTY 
Robert M.D. Turk, Judge 
 
 
I. 
FACTS AND PROCEEDINGS BELOW 
 
Appellant, LZM, Inc. (“LZM”) is in the business of leasing 
portable toilets and offers a pumping service to customers who 
lease LZM toilets.  LZM negotiates contracts for the lease and 
pumping services at the same time and includes all charges in a 
single invoice, although the rental and pumping charges are 
separately stated.  No toilet rental customer is required to 
contract for LZM’s pumping services, and not all of LZM’s toilet 
rental customers elect to contract for pumping services.  LZM 
charges additional fees for pumping services. 
 
The Virginia Department of Taxation (“Department”) conducted 
a sales tax audit of LZM for the period beginning October 1, 1996, 
and ending September 30, 1999.  The Department found that LZM 
neglected to collect and remit sales tax during that period for 
the amounts charged for pumping services provided in conjunction 
with its portable toilet rentals.  The Department assessed LZM for 
the deficiency, and after administratively challenging the 
 
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assessment, LZM paid the amount due, plus interest, under protest.  
LZM then timely filed a Bill of Complaint to recover the disputed 
sum.  Both parties filed motions for summary judgment. 
 
Based upon the pleadings, a stipulation of facts, and an 
evidentiary hearing at which supplemental evidence regarding the 
operation of LZM’s business was taken, the trial court denied 
LZM’s motion for summary judgment and granted summary judgment in 
favor of the Department.  We awarded LZM an appeal. 
 
LZM assigns error to (1) the trial court’s application of 
the true object test to its portable toilet rentals because the 
transaction involved a lease, not a sale, and the trial court’s 
holding the pumping service is separate and distinct from the 
lease of the portable toilets; (2) the trial court’s finding 
that the statutory exemption from taxation for maintenance 
contracts did not apply; and (3) the trial court’s findings of 
fact which LZM maintains were contrary to the stipulated facts, 
uncontradicted testimony, and admissions of the parties.1  For 
the reasons stated below, we will affirm the judgment of the 
trial court. 
II.  ANALYSIS 
                     
1 LZM also assigns error to the trial court’s application of 23 
VAC 10-210-4040 to lease transactions.  This assignment of error 
is subsumed within its first assignment of error and 
duplicative, so it will not be separately addressed. 
 
3
Charged with the responsibility of administering and 
enforcing the tax laws of the Commonwealth under Code § 58.1-
202, the Department’s interpretation of a tax statute is 
entitled to great weight.  Department of Taxation v. Delta Air 
Lines, Inc., 257 Va. 419, 426, 513 S.E.2d 130, 133 (1999) 
(citation omitted).  Further, “[a]ny assessment of a tax by the 
Department shall be deemed prima facie correct."  Code § 58.1-
205.  See General Motors Corp. v. Department of Taxation, 268 
Va. 289, 292-93, 602 S.E.2d 123, 125 (2004); Chesapeake Hosp. 
Auth. v. Commonwealth, 262 Va. 551, 560-61, 554 S.E.2d 55, 59 
(2001). 
A presumption of validity therefore attaches to an 
assessment of tax, and the burden is on the taxpayer to show 
that such assessment was the result of “manifest error” or in 
“total disregard of controlling evidence.”  County of 
Mecklenburg v. Carter, 248 Va. 522, 526, 449 S.E.2d 810, 812 
(1994) (citation omitted).  Plainly, a court should not overturn 
the Department's decision unless the assessment is contrary to 
law, was an abuse of discretion, or was the product of 
arbitrary, capricious, or unreasonable behavior.  Department of 
Taxation v. Lucky Stores, 217 Va. 121, 127, 225 S.E.2d 870, 874 
(1976). 
Exemptions of property from taxation are to be strictly 
construed against the taxpayer.  Va. Const., art. X, § 6(f).  
 
4
See, e.g., Department of Taxation v. Wellmore Coal, 228 Va. 149, 
153-54, 320 S.E.2d 509, 511 (1984).  The taxpayer has the burden 
of establishing that it comes within the terms of an exemption.  
DKM Richmond Assocs. v. City of Richmond, 249 Va. 401, 407, 457 
S.E.2d 76, 80 (1995).  When a tax statute is susceptible to two 
constructions, one granting an exemption and the other denying 
it, the latter construction is adopted.  WTAR Radio-TV v. 
Commonwealth, 217 Va. 877, 879-80, 234 S.E.2d 245, 247 (1977); 
Winchester TV Cable Co. v. Commissioner, 216 Va. 286, 289-90, 
217 S.E.2d 885, 889 (1975). 
A. 
Application of the true object 
test to lease transactions 
 
Virginia imposes a retail sales tax on the sale or rental 
of tangible personal property.  Code § 58.1-603.  “Sale,” for 
purposes of the tax includes “lease or rental” of tangible 
personal property.  Code § 58.1-602.  Charges for services, 
however, are generally exempt from the sales tax.  Code § 58.1-
609.5. 
In the case at bar, LZM agrees that the gross proceeds of 
its lease fees for portable toilets are subject to sales tax, 
but maintains that fees received for toilet pumping services are 
charges for distinct services and are therefore not subject to 
tax.  The trial court applied the true object test under 23 VAC 
 
5
10-210-4040 and found that the pumping service charges were 
taxable. 
The true object test is the means by which the Department 
determines the dominant purpose of a mixed sales and service 
transaction in order to determine whether the transaction is 
subject to sales tax as a sale of tangible personal property or 
whether it is a sale of services and therefore exempt from tax.  
The true object test was adopted by this Court in WTAR, 217 Va. at 
883, 234 S.E.2d at 249, in which we acknowledged the endorsement 
of the test by a preponderance of authorities. 
The Department promulgated regulations pursuant to the 
Court’s adoption of the true object test, in which it explained 
the test as follows: 
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. 
 
23 VAC 10-210-4040(D) (2004) (“Regulation 4040”).  LZM argues that 
the trial court should not have applied the true object test to 
the transaction in question because it involved the lease, rather 
than the sale, of tangible personal property. 
 
LZM bases its argument on the fact that the term “lease” is 
not found in Regulation 4040 describing the true object test.  It 
 
6
asserts that the plain language of the regulations demonstrates 
that the Department uses a different mode of analysis for lease 
transactions and that the true object test should only apply to 
actual sales.  LZM argues that 23 VAC 10-210-840 (“Regulation 
840”), not Regulation 4040, applies to lease transactions. 
Regulation 840 makes no mention of the true object test and 
states in pertinent part: 
Any person engaged in the business of leasing or 
renting tangible personal property to others is 
required to register as a dealer and to collect and 
pay the tax on the gross proceeds. 
 
23 VAC 10-210-840(A) (2004).  Gross proceeds are defined as “the 
charges made . . . for the lease or rental of tangible personal 
property” including “any service charges in connection with the 
lease of [the] property.”  Id.  LZM maintains that because not 
all of its customers contract for toilet pumping services and 
because such charges are stated separately on its invoices, the 
pumping services are not “service charges in connection with the 
lease of [the toilets],” and therefore not taxable under 
Regulation 840.  Id. 
 
It is a familiar rule of statutory construction that when a 
given controversy involves a number of related statutes, they 
should be read and construed together in order to give full 
meaning, force, and effect to each.  Ainslie v. Inman, 265 Va. 
347, 353, 577 S.E.2d 246, 249 (2003) (citation omitted).  
 
7
Moreover, appellate courts read related statutes in pari materia 
in order to give, when possible, consistent meaning to the 
language used by the General Assembly.  Industrial Dev. Auth. v. 
Bd. of Supervisors, 263 Va. 349, 353, 559 S.E.2d 621, 623 (2002).  
Regulation 4040 applies the true object test to transactions that 
include both sales and service elements.  Code § 58.1-602 defines 
a “sale” to include “lease or rental.”  Since a “sale” thus 
includes “lease” transactions, the trial court correctly found 
that Regulation 4040 applies to both actual sale and lease 
transactions so the true object test is applicable in both 
instances.  We find that, when construed together, no conflict 
exists between regulations 4040 and 840.  They are not mutually 
exclusive and neither negates application of the true object test 
to a lease transaction. 
 
Alternatively, LZM argues that even if the true object test 
applies to lease transactions, the test should not apply to the 
pumping service component because it is separate and distinct from 
the toilet lease.  In support of its position, LZM posits the 
segregated billing charges on its invoices (divided between 
pumping and lease charges) and that the pumping service is an 
independent transaction not joined to the leasing of a portable 
toilet. 
 
In WTAR, this Court decided whether the service involved in 
creating a television commercial should be taxed as part of the 
 
8
final product, the commercial film.  In its billing statements, 
the taxpayer charged separately for the service and the film.  217 
Va. at 878, 234 S.E.2d at 246.  The Court, however, applied the 
true object test and held that “the true object of the buyer of 
the advertisement was not the service per se, but the end product 
produced by the service.”  Id. at 884; 234 S.E.2d at 249.  
Therefore, the service involved in making the film was taxable.  
Id. 
 
LZM attempts to distinguish WTAR by arguing that “but for” 
the service in producing the advertisement, the end product of the 
commercial film would not come into existence.  By contrast, LZM 
avers that the end product of the leased toilet would be otherwise 
available and is not dependent upon the provision of the pumping 
service.  Under the facts of this case, however, we must disagree. 
 
Like the film-making services in WTAR, the pumping services 
provided by LZM produce the true object of the transaction, a 
functioning portable toilet, which is the end product the 
customer seeks.  But for the pumping services, the portable 
toilet would not function properly and would therefore not be 
commercially viable.  Customers do not rent portable toilets for 
the waste removal services. 
 
Moreover, LZM provides the pumping service only to those 
customers who lease its portable toilets.  The record does not 
reflect that LZM provides pumping services as an independent 
 
9
commercial endeavor, but only as inextricably connected to the 
condition precedent of leasing an LZM toilet.2 
 
Further, LZM charges for pumping services based upon the 
number of portable toilets leased and not by the amount of waste 
pumped.  If the pumping service were a separate and distinct 
object of the transaction, then the price would be based on the 
requirements of the pumping itself.  The trial court found that 
because all portable toilets must be pumped eventually and the 
charge is not regulated by the amount of waste removed, the 
pumping service makes the lease of portable toilets the end 
product or true object sought by the consumer. 
 
As we also noted in WTAR, the taxpayer’s “manner of 
computing the invoice” is not determinative of either the true 
object of the transaction or whether the service provided is 
truly separate and distinct from the property leased.  217 Va. 
at 884, 234 S.E.2d at 249.  Otherwise, a taxpayer could create 
its own tax exemption merely by altering the printing of its 
invoices. 
B. 
The Maintenance Contract Exemption 
                     
2 The record did reflect that LZM and other similar portable 
toilet rental companies exchange pumping services where 
practical, and the pumping company did charge for the pumping.  
For example, if LZM had several toilets in a location and a 
competitor had only one, LZM would pump for the competitor who 
would reciprocate for an LZM toilet in a similar or isolated 
situation.  However, nothing in the record indicated this 
practice was anything but a practical accommodation of 
convenience. 
 
10
Code § 58.1-609.5 exempts from application of the sales tax 
those maintenance contracts which provide for both repair or 
replacement parts and repair labor.  A maintenance contract is 
“any agreement whereby a person agrees to maintain or repair an 
item of tangible personal property over a specified period of 
time for a fee which is determined at the time the agreement is 
entered into.”  23 VAC 10-210-910(A) (2004). 
 
The trial court found that while LZM “may call [the contract 
which included the pumping services] a tax-exempt maintenance 
contract . . . [the evidence shows] that it was . . . an 
incidental agreement and that the main purpose of the entire 
transaction was for the lease of the toilet[s].”  Citing 
Strickland v. Sperry Rand Corp., 285 S.E.2d 1 (Ga. 1981), LZM 
argues that the maintenance contract exemption applies to the 
provision of toilet pumping services. 
 
In Strickland, an electronic equipment rental corporation 
collected and remitted sales tax on its rental charges, but did 
not collect sales tax on maintenance charges.  Id.  Ruling on an 
assessed deficiency based on the maintenance charges, the Supreme 
Court of Georgia held that the maintenance charges were not 
taxable as part of the gross lease charge.  Id. at 2.  The Court 
found that the corporation was not liable for sales tax on its 
maintenance charges because the price of maintenance varied with 
each piece of equipment, and the cost of maintenance was based 
 
11
upon a cost analysis of repair and preventive maintenance of each 
particular piece of equipment.  Id. 
 
The difference between the case at bar and Strickland clearly 
shows that the charges for pumping services are not exempt costs 
under a maintenance contract.  While the electronic equipment in 
Strickland required maintenance only to prevent or correct a 
defect, the portable toilets are specifically designed to require 
the pumping services in conjunction with their use.  Such proper 
and normal use necessitates the regular removal of accumulated 
waste.  The pumping services do not repair or maintain the toilets 
in order to reduce the likelihood of a defect in the future.  
Rather, it is the pumping services that render the toilets useful 
and without which they could not be leased. 
 
The maintenance contract exemption contemplates services in 
addition to those necessary to the item’s immediate function.  The 
exemption, therefore, does not apply to the portable toilet 
pumping services, and we find nothing in the statute or 
regulations that would carve out an additional exception. 
C.  Trial Court’s Findings of Fact 
 
LZM also contends that certain of the trial court’s findings 
were contrary to the undisputed facts.  Specifically, LZM contests 
the trial court’s following findings as contrary to stipulated 
facts, uncontradicted testimony, or the admissions of the parties: 
(1) that “pumping service is not offered as a separate service to 
 
12
individuals.  It is only offered to a lessee of the portable 
toilets;” (2) that LZM “was assessed a sales and use tax...for the 
leasing and pumping service of portable toilets” (emphasis added); 
(3) that 445 toilets were leased by LZM in June 1999; and (4) that 
LZM charges “by the number of portable toilets leased and not by 
the amount of waste pumped from the toilets.” 
1. 
Toilet pumping as a separate service 
 
The trial court’s letter opinion does recite that LZM’s 
“pumping service is not offered as a separate service to 
individuals.”  The trial court also noted that LZM sometimes pumps 
the toilets of other rental companies and charges those companies 
for the service.  LZM’s competitors provide a reciprocal service 
to LZM where the circumstances make it economically practical.  
Larry Z. Martin, LZM’s representative, testified that LZM does not 
compete with these other companies for the toilet pumping service, 
nor does LZM advertise prices for pumping services.  Martin 
testified that pumping the toilets of another company is a 
“respected tradition between the rental businesses” for the 
convenience of all toilet rental businesses.  Essentially, the 
trial court found, as we noted in the discussion of LZM’s first 
assignment of error, supra, that LZM was not in the business of 
pumping portable toilets, but did so only to make its rental 
business practical.  That finding is supported by the record. 
2. 
Assessment of tax deficiency 
 
13
 
The trial court’s letter opinion does state that LZM “was 
assessed a sales and use tax . . . for the leasing and pumping 
service of portable toilets.”  The court’s ruling, however, is 
based on the true object test, which determines whether the entire 
transaction, i.e. both the sales and service components, is 
taxable.  The Department’s assessment against LZM was based on 
taxes owed “on [the] pumping of portable toilets.”  The trial 
court’s misstatement of the Department’s assessment did not affect 
the protested amount or the trial court’s analysis under the true 
object test. 
3. 
The number of toilets leased in June 1999 
 
The trial court incorrectly states the number of toilets 
leased during the month of June 1999 as 445.  The record shows 
that LZM rented 612 toilets during that period: 445 with weekly 
pumping service, 115 with no service at all, and 52 with extra 
service.  This misstatement of the number of toilets rented has no 
bearing on the trial court’s finding that the pumping service is 
incidental to the rental of the portable toilets and that the true 
object of the transaction was the procurement of the toilets.  The 
fact remains that no pumping service was offered except upon 
leasing an LZM toilet. 
4. 
Service charges for pumping toilets 
 
In its letter opinion, the trial court notes that LZM 
“charges by the number of portable toilets leased and not by the 
 
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amount of waste pumped from the toilets.”  Martin testified that 
toilets without service “probably cost less” to rent than those 
with service, but there is nothing in the record that indicates 
any price differential based on the amount of waste pumped. 
 
Even assuming that Martin’s statement is correct, the trial 
court’s finding is not contradictory.  Its finding that the 
pumping charge does not vary by the amount of waste pumped is 
supported by the record. 
III.  CONCLUSION 
 
We conclude that under Code § 58.1-602 and Regulation 4040, 
the true object test applies to lease/service transactions as well 
as sales/service transactions.  The trial court did not err in 
applying the true object test and in finding that the pumping 
services were inseparable from the portable toilet rentals under 
the facts of this case.  Further, the trial court did not err in 
holding that the maintenance contract exemption does not apply.  
The trial court’s misstatements did not produce a judgment that 
was contrary to the testimony and stipulated facts.  Accordingly, 
we will affirm the judgment of the trial court granting summary 
judgment to the Department. 
Affirmed.