South Carolina Applies True Object Test to Sanitation Business

How does a seller know if, for sales tax purposes, a transaction should be treated as taxable property or a nontaxable service? Guidance in South Carolina and Georgia illustrate how the “true object” test can be used to make a determination.

Often, service transactions involve the customer also receiving tangible personal property. For example, a lawyer drafts a client’s will and at the end of the engagement, an executed written will is delivered to client. How does the seller know if, for sales tax purposes, the transaction should be treated as taxable property or a nontaxable service?

Many states apply the “true object” test to determine how to categorize the transactions. For a detailed discussion on the true object test, please see our July 2015 newsletter article. Simply put, the true object test examines whether the purchaser’s “true object” was to obtain the underlying tangible personal property or the service provided through the tangible personal property.

In a recent South Carolina Court of Appeals case, a provider of portable toilets claimed that the business was not subject to sales tax because it provided nontaxable sanitation services. [1] The South Carolina Department of Revenue took the position that the taxpayer was engaged in the taxable rental of tangible personal property (i.e., the portable toilets). The business owner argued that her company provided a nontaxable service (i.e., the removal and disposal of human waste).

However, after examining the lower court’s findings of facts, the Court upheld the South Carolina Department of Revenue’s determination that the “true object” of the business was the taxable rental of portable toilets. Evidence that the lower court had relied on included the business’ website, contracts, invoices and pricing structure. The lower court found that the website referred to the business as a rental business, the description regarding the use of the portable toilets was worded in the terms of rentals and the pricing structure indicated that the price would be dependent on the number of portable toilets ordered, instead of being based on the length of time of the events or the volume of the waste removed. All of these factors were consistent with the terms of taxable rental transactions instead of the provision of service. [2]

Interestingly, due to the fact that “true object” determinations are based on the facts and circumstances of each situation and are subjective, states can have different views on whether a particular transaction involves the taxable sale of property or the nontaxable provision of a service. For example, in Georgia, a 2009 Informational Bulletin addressed the sales tax treatment of the lease of portable toilets in conjunction with the mandatory services provided with the toilets and determined that the business was properly characterized as a service. [3]

In making this determination, the Georgia Department of Revenue considered the value/cost of the tangible personal property being transferred compared to the value/cost of the services that were being provided. The Department found that the value/cost of providing a sanitation service greatly outweighed the value/cost of the portable toilets.

The South Carolina case discussed above demonstrates the importance of careful planning when engaging in transactions involving services and property. The “true object” test is highly fact-sensitive, and sometimes, the “form” of the transaction can be given more weight than its “substance.” Perhaps if the taxpayer in the South Carolina case had described the business differently on the website and used more favorable language in its documentation, the Court may have determined that the business was a nontaxable service.

It is easy for a sales tax auditor to adopt a transaction’s form if it results in a taxable transaction, and trying to argue substance can be an uphill battle. The members of HA&W’s SALT team understand these rules and are able to apply them to your business and recommend practical and favorable solutions to minimize tax risks. We will continue to monitor these and other significant sales and use tax developments and include any updates in future issues of the HA&W SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Eugenia Boggero, d/b/a Boggero’s Portable Toilets v. South Carolina Department of Revenue, Appellate Case No. 2014-000214 (S.C. App. 2015).

[2] It is worth noting that the Court reviewed the lower court’s determination as a question of fact and therefore would have only reversed the lower court if there was not substantial evidence to support the lower court’s finding. Indeed, the Court noted that the lower court could have reasonably determined that the business provided a service.

[3] Information Bulletin SUT 2009-09-25

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 this matter.

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