By David Pope and Timothy Gustafson

The Virginia Tax Commissioner determined that an out-of-state manufacturer was subject to use tax on “local marketing group” fees charged to its customers because the true object of the transaction was the sale of tangible personal property. The taxpayer manufactured heating, ventilating and air conditioning (HVAC) systems for sale to independent contractors who, in turn, installed the systems as capital improvements to real property. The taxpayer charged a mandatory 2% fee on the sales price of the products for training and advertising costs, separately contracting for the fee with each customer, separately stating the fee on each customer’s invoice, and limiting the fee to a maximum of $10,000 per customer per year. Despite the foregoing, the Commissioner determined that the fees were “inextricably linked” to the products because the fees were mandatory and computed as a percentage of sales; the taxpayer permitted a discount on the sale of the product if the fees were paid timely; the fees were collected for training and advertising expenses that contributed to and benefited the sale of the taxpayer’s products; and the fees were similar to overhead expenses. With minimal analysis of Virginia’s “true object” rules, the Commissioner concluded the true object of the transaction was the sale of the HVAC products, and therefore the entire sales price, including the separately stated fees, was subject to use tax. Virginia Rulings of the Tax Commissioner, Document No. 13-167 (Aug. 27, 2013).