TR 40: Service Enterprises

Business engaged in rendering a service are generally consumers rather than sellers of tangible personal property. Tangible personal property which is incidentally transferred with the service to the customer is taxable to the service provider, not to the customer. Service businesses that also sell tangible personal property or taxable services must collect sales tax on these sales. If the charge for service is not separately stated from the charge for tangible personal property, the entire amount is subject to sales/use tax.

To determine if a transaction is a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service, one must look to the true nature of the transaction. If the transaction is for advisory services, record keeping, payroll, architectural, tax and like services and the tangible personal property is forms, binders, blueprints, reports or other like property, the tangible personal property is incidental to the performance of the service and, therefore, taxable to the service provider, not the customer. If the purchaser's primary interest is in the physical property of the item purchased, the item is subject to sales/use tax when sold.

Copies sold of the tangible personal property incidental to the performance of a service are subject to sales/use tax. The transfer of the original manuscript by an author to the publisher for the purpose of publication is not subject to sales/use tax. However, the sale of printed copies of the author's book would be subject to sales/use tax.

Sales/use tax would apply to the sale of artistic expressions in the form of paintings, photographs, sculptures and similar artwork, even though the work of art may express an original idea. Generally custom-made items are subject to sales/use tax, with the exception of an original prototype. The materials used to make orginal prototypes are subject to sales/use tax. The purchaser's primary interest in custom-made items is in the physical property of the item being purchased. Therefore, they are taxable when sold.

The development of information in a research and development contract is not a sale of tangible personal property in the form of a prototype, model, plan, design or like items. Rather it is a contract for information which is an intangible service that cannot be conveyed orally and can only be conveyed via tangible personal property, which is incidental to the service. The materials used to make the prototypes, models, plans, design and like items are subject to sales/use tax to be paid by the service provider (see TR39: "Samples, Gifts, Give-a-Ways, demos, Prototypes and Conditional Sales" for detailed information). Any copies or additional prototypes and models would be subject to sales/use tax when sold.

When the transaction is determined to be the sale of tangible personal property, sales tax would apply to the full sale price for the item. Deductions are not allowed for labor, management, thought, time or other separately stated items.

Examples

1. An architectural design firm contracts with a land developer to design a subdivision. The architect transfers blueprints and a 3-D model of the development. The developer requests two additional sets of blueprints and two additional models for his two partners. The original set of blueprints and 3-D model are not taxable to the developer, because they are incidental to the service; but the materials used to make them are taxable to the architect. The additional two sets of blueprints and models are taxable to the developer because they are copies.
   
   
2. A law firm contracted with an artist to design and build a sculpture for the firm's lobby. The artist's invoice read: materials $500.00, design work $1,000.00 and labor $2,000.00. The entire invoice is subject to sales/use tax, even though it is separately stated. A deduction for labor and design is not allowed when the transaction is a sale of tangible personal property.

Last Updated on Tuesday, 10 July 2012 16:01