The Department has recently issued Revenue Ruling 1-08-6, which addresses whether a service provider may purchase tangible personal property tax-free for resale when the tangible personal property is provided to the customer as part of the service.
In the ruling, the Department gave its opinion that any tangible personal property used by a service provider in providing its services cannot be resold in the course of the seller’s business and therefore cannot be purchased by the service provider tax-free for resale. Furthermore, the total amount charged by the service provider for services and any tangible personal property transferred incidentally constitutes one transaction, regardless of the fact that the two components may be contracted for separately.
The Department established that the “incidental-to-service” test could be used to determine whether a transaction involving both a service and the transfer of tangible property was principally the sale of a service or the transfer of tangible property. The incidental-to-service test looks objectively at the entire transaction and considers six key factors:
- The object sought by the buyer;
- The seller’s type of business;
- Whether the tangible personal property was provided as a retail enterprise with a profit making motive;
- Whether the tangible personal property could be sold without the service;
- The extent that the services have contributed to the value of the tangible items transferred; and
- Any other factors relevant to the particular transaction.
If, under the incidental-to-service test, the rendition of services is the principal object of the transaction, then any tangible personal property transferred is deemed to be incidental to the service. Such tangible personal property may not be purchased tax-free for resale.
The Department then provided an example of the application of the “incidental-to-service” test for data processors, who often furnish reports or statements to the customer or the customer’s cardholders in the performance of the data processing services. The Department applied the factors of the incidental-to-service test to data processing transactions and determined that the service component was the principal element of those transactions. Therefore, the purchase by a data processor of tangible personal property, such as statement paper and envelopes, was deemed to be incidental to the service. The data processor was the consumer of the statement paper and envelopes and was not eligible to purchase the paper and envelopes tax-free for resale.
This ruling indicates the Department’s inclination not to allow service providers to purchase tangible personal property tax-free for resale – even when the tangible personal property is sold under a separate contract. This contrasts with some court decisions in other states which have allowed companies to both provide services and purchase tangible personal property tax-free for resale, particularly where the sale of services and tangible personal property were done under separate contracts.