Georgia Addresses Sales of Services Versus Tangible Personal Property

December 10, 2019

When businesses provide tangible personal property in connection with the delivery of a service, states often engage in a fact-specific and subjective analysis to determine whether the transaction should be treated for sales tax purposes as a taxable sale/lease of property or an exempt sale of a service.

By Tina M. Chunn, SALT Senior Manager

One of the more difficult areas of sales tax is evaluating the taxability of a transaction that includes both services and tangible personal property for one non-itemized price.  Common examples of this include a lawyer engaged to draft a will or a professional photographer hired to take pictures at an event and prepare an album.  Depending on how the state views that transaction, the entire charge may or may not be taxable.

Due to the fact that these types of analyses are very fact-specific, taxpayers will often request a ruling from the state.  Recently, Georgia issued a ruling on the application of its sales tax rules to a transaction involving the use of tangible personal property in connection with the delivery of services.[1]

The taxpayer provides energy savings to its customers through the use of its technology platform.  For each customer, the taxpayer (i) establishes a baseline energy consumption and cost, (ii) designs a customized retrofit to maximize savings and improve aesthetics, (iii) executes the retrofit by purchasing and installing efficiency technology equipment and energy consumption reading equipment, and (iv) bills the customer based on achieved energy cost savings.

The efficiency technology equipment includes LED tubes, lamps and bulbs, smart controls, HVAC equipment, water conservation tools and circuit-level electricity consumption meters.  The taxpayer owns and maintains the equipment for the life of the agreement and replaces any malfunctioning equipment.  Further, all upfront and replacement costs for material, labor, project management, components and installation are paid by the taxpayer with no cost to the customer.

This equipment is purchased solely by the taxpayer and the customer does not have the right or ability to operate, access or alter any component.  Once the equipment is installed, the services provided by the taxpayer do not require any human involvement (other than maintenance repairs and replacements) as performance monitoring is done by comprehensive micro-meters installed to measure electricity consumption and performance on a fixture or circuit-level basis.  This micrometer data is collected and fed into the taxpayer’s cloud-based analytics software.

At the end of a service agreement, the taxpayer either removes the property and equipment or abandons it at customer site.  The customer does not have the option to purchase the equipment as they do not have a way to operate it.

For sales tax purposes, this transaction may be viewed as either a nontaxable service or as a taxable lease of tangible personal property (since the taxpayer still owns the equipment).  In these situations, states typically apply what is commonly referred to as “the true object test,” or as the Georgia ruling notes, a “for the purpose of the customer” test to make this determination regarding whether the sale is a sale of tangible personal property or a sale of service.

For example, does the customer primarily want to purchase a skilled service because it cannot perform such services for itself due to lack of equipment, time or skill, and the equipment is incidental to and merely a means to provide the service?  If so, then this transaction is typically viewed as a service and not subject to sales and use tax.  However, if the customer is primarily interested in acquiring the tangible personal property used to provide the service, then the transaction is treated as a sale of tangible personal property and is subject to sales and use taxes.

In this specific transaction, Georgia ruled that the taxpayer is providing a service and the tangible personal property is merely used to assist in providing that service.  Georgia specifically noted the following factors that supported treating the transaction as a service:

  • The taxpayer owns and controls all the equipment at all times and the customer is not able to operate, access, or alter any equipment. The customer has no need to understand the technology or the operational aspect of the equipment.
  • The taxpayer only charges customers based on a percentage of saving that is provided. The customer’s only interest is in the savings created by the taxpayer’s technology.
  • The customer can’t duplicate the service since it is based on the taxpayer’s proprietary software which the taxpayer relies upon to create the energy savings.

The state did note a couple of factors that supported treating the transactions as a lease of tangible personal property.  First, the taxpayer’s control over the equipment is passive and possession lies with the customer throughout the contract.  Second, the taxpayer delivers and installs the equipment, and although its fees are based on the energy savings, those savings are derived from the performance of the equipment.  However, balancing all of those factors, the state viewed the customer as purchasing a service from the taxpayer.

Aprio’s SALT team is experienced with reviewing these types of transactions and can assist you in making these sales tax determinations regarding your particular sales transactions in Georgia and other states. In particular, where a business may want certainty in its position, we can prepare ruling requests and work with the state to achieve the desired outcome.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the Nov./Dec. 2019 SALT Newsletter.

[1] Georgia Letter Ruling Number: LR SUT-2019-01, May 21, 2019.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.