Opinion ID: 1059000
Heading Depth: 2
Heading Rank: 1

Heading: Application of the true object test to lease transactions

Text: 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 XX-XXX-XXXX 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 XX-XXX-XXXX(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 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 XX-XXX-XXX (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 XX-XXX-XXX(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). 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 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 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.