Policy Letter; Re: Taxability of Gross Receipts, Your Letter, 10/24/94
Topic Code: G156Gross Receipts (ST) Document Reference:
Policy letter; Re: Taxability of Gross Receipts, Your Letter, 10/24/94
Please allow me to introduce myself. My name is Darwin Clupper. I am a technical tax specialist with the Department's Policy Section. My particular area of concentration is Iowa sales and use tax law. Your recent letter to Mr. Egge has been given to me for review and comment. Having studied this matter in some detail, I must disagree most strenuously with your conclusion that a substantial portion of the gross receipts from the contract between and is exempt from Iowa sales tax. In my judgment, all of the gross receipts from the contract are taxable. To explain this conclusion, I begin by citing various sections of the contract in question. Section 1.1 states that under the contract is obligated to provide certain "services" to . Subsequent sections of the contract characterize those "services" as follows: 1.2 SERVICES. Except as provided otherwise in Section 2.3 and elsewhere in this Agreement, shall, upon notification from the Facility during the term of this Agreement, perform or have performed, Corrective Maintenance (as defined in Section 8.3 below) for the Equipment described in Article II below (hereinafter, the "Equipment") within a time frame consistent with the needs of the Facility, as mutually agreed upon by each department. shall also perform Preventive Maintenance (as defined in Section 8.8 below) in order to reduce downtime and minimize maintenance costs of the Facility and during the term of this Agreement. Finally, may perform additional consulting or other services for the Facility for such compensation and upon such other terms and conditions as may be mutually agreed upon by both parties. shall not be responsible for any item of Corrective Maintenance of which it is not notified during the term of this Agreement.
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8.3 CORRECTIVE MAINTENANCE. The term "corrective Maintenance" shall mean repairs necessitated by normal usage of the Equipment, excluding, without limitation, Capital Improvements (as defined in Section 8.6 below) or abnormal use.
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8.8 PREVENTIVE MAINTENANCE. The term "Preventive Maintenance" shall mean planned maintenance and performance and electrical safety testing required by manufacturer specifications, Joint Commission on Ac creditation of Health Care Organizations standards and applicable governmental regulations and such other maintenance and testing as and Health System may determine to be appropriate.
701-18.25(422,423) Warranties and maintenance contracts.
18.25(1) In general—definitions. "Mandatory warranty." A warranty is mandatory within the meaning of this regulation when the buyer, as a condition of the sale, is required to purchase the warranty or guaranty contract from the seller. "Optional warranty." A warranty is optional within the meaning of this regulation when the buyer is not required to purchase the warranty or guaranty contract from the seller.
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18.25(3) Optional warranties. For periods after June 30, 1981. The sale of optional service or warranty contracts which provide for the furnishing of labor and materials and require the furnishing of any taxable service enumerated under Iowa Code section 422.43 is considered a sale of tangible personal property the gross receipts from which are subject to tax at the time of sale.
18.25(4) A preventive maintenance contract is a contract which requires only the visual inspection of equipment and no repair is or shall be included. The gross receipts from the sale of a preventive maintenance contract is not subject to tax.
I would agree with your beginning and basic analysis. The "corrective maintenance" service is an optional service contract which requires the performance of the service of machine repair, taxable under § 422.43(11) of the Iowa Code. The performance of this taxable service is treated as the sale of tangible personal property for the purposes of Iowa sales tax law, and it is important to hold this in mind for the purpose of future analysis. I would also agree that the "preventive maintenance" service described in § 8.8 of the contract is the same nontaxable "preventive maintenance" described in subrule 18.25(4) and the performance of that service is nontaxable. To summarize, § 1.1 of the contract states that shall perform certain services for , and § 1.2 of the contract states that those services are corrective and preventive maintenance. Sections 1.1 and 1.2 mention no other services, but § 1.2 states " may perform additional consulting or other services for the Facility for such compensation and upon such other terms and conditions as may be mutually agreed upon by the parties". In spite of the existence of the sentence just previously quoted, I do not think that the services of management and purchasing which performs are "additional...services" for which the parties have agreed that will be paid additional compensation. The compensation is provided in one lump sum (Addendum 1), and the provisions of the contract which mentions purchasing and management clearly state that those services are provided only as a part obligation to provide corrective and preventive maintenance services, and there is no purchasing or management independent of the delivery of those services. Sections 1.7 and 3.1 of the contract state: 1.7 PURCHASE Notwithstanding any other provision of this Agreement, shall purchase, as an agent of the Facility and not on its own behalf, all goods and services to be provided by outside vendors under this Agreement as may otherwise be subject to sales or other tax if purchased through . The Facility, and not , shall be directly liable to such vendors for the purchase price of such goods and services, title to which shall pass directly from such vendors to the Facility. The Facility shall provide with appropriate copies of such documents, including, without limitation, Facility purchase order forms and tax exemption certificates and information, and take such other actions as may be reasonably requested by in connection with the provisions of this Section.
3.1 STAFFING. will provide, at its expense, technical, support and management personnel to perform the services described in Article I with respect to the Equipment described in Article II. including an on-site resident manager and such other personnel as deems appropriate. If the Facility objects to any member of on-site staff and the grounds for the objection are not rectified to the Facility's satisfaction within a reasonable time thereafter, shall replace that member upon notice from the Facility's chief operating officer. (Emphasis added.)
failure to charge Iowa sales tax on 30% of each lump sum payment due under the contract and its justification for that practice, can a retailer selling tangible personal property "break out" the cost of services which are a part of that retailer's taxable gross receipts and refuse to charge tax on that excluded amount? By no means, this procedure has been uniformly condemned (see cases cited in 10 A.L.R. 4th 1209 and 2 A.L.R. 4th 859). One court has stated that allowing such a practice would destroy the sales tax altogether, Crescent Amusement Co. v. Carson, 187 Tenn. 112, 213 S.W.2d 27 (1948). An exception is allowed in Iowa law for "transportation services". The value of these services is excluded from tax even though that value is part of taxable gross receipts from the sale of tangible personal property initially, see Iowa Code, § 422.45(2). So "transportation services" is exempt from tax on the sale of tangible personal property in a way that installation, packaging and other charges are not. In summary then, the value of management and purchasing services which are part of the receipts from the performance of the optional service contract cannot be excluded from taxable gross receipts of the sale of tangible personal property which Iowa law states this transaction to be. The contract between and provides for the sale of tangible personal property (optional service contract) and for the performance of a nontaxable service (preventive maintenance contract) in return for a lump sum payment. How is such a contract to be taxed for the purpose of Iowa sales tax law? All of the rules and cases to which you refer stand for the proposition that the entire lump sum is taxable gross receipts absent any evidence that there has been a separate bargaining for and sale of the taxable property and the nontaxable service. Thus the reference in rule 701-15.14 is to installation charges which are not part of the gross receipts from the sale of tangible personal property if "the installation charges are separately contracted". And if a written contract exists and "the written contract contains no provisions separately itemizing such charges, tax is due on the full contract price". Rule 701-15.13 contains similar language: "Where a sales agreement exists, the freight and other transportation charges are subject to tax unless the freight and other transportation charges are separately contracted. If the written contract contains no provisions separately itemizing such charges, tax is due on the full contract price...." Similarly language is found in rules 701-16.4, 18.27 and 18.34. There is no separate contract of sale or sale price for the service of preventive maintenance, so all is subject to tax. Enclosed with this letter is a copy of Department rule 701-X.5(17A) Refusal to issue ruling. I would suggest that reasons 5 and 8 provide good grounds for refusing to issue a declaratory ruling applicable to your existing contract. In closing, I must issue my usual warning. The opinions which I have expressed in this letter are informal only. Because of this, the Department could, in the future, take a position contrary to them. Sincerely, Darwin D. Clupper Tax Specialist, Policy Section Compliance Division