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What’s the True Object of the Transaction? Portable Toilets Case Finds Its Way to LA Supreme Court

It never ceases to amaze me, the wide variety of companies that state agencies attempt to extort money from. I mean, how could a portable toilet company possibly have a sales tax problem? Most states impose a sales tax on the sale or rental of tangible personal property, but do not tax services. From the perspective of a toilet industry, if a venue rents a toilet, it is clearly a rental of tangible personal property subject to tax. If the same venue pays a fee to clean the toilets, then it sounds like a nontaxable service. But what happens when the venue rents the toilet and purchases the cleaning service along with it? In this part tangible personal property rental, part service transaction (known to the sales and use tax attorney as a “mixed transaction”), is only part of the transaction taxable or is the entire charge subject to sales tax? Many states take the incredibly helpful “it depends” approach, and look to an even more helpful “object of the transaction” test. In reality, it truly seems like state agencies and courts reach a conclusion first and fill in the reasons later.

By way of brief background, since the mid-1900’s, when states enacted their primitive versions of a sales tax, many courts created this “object of the transaction” test. The test attempted to formulate what the customer was truly purchasing, product vs service. If it was a service then it is generally not taxable, but if it is a product then it typically is subject to sales tax. For example, if you went to a lawyer for advice and left with a tangible document, like a will or a contract, then you were obviously buying a service and the will was incidental. Conversely, if one goes to a restaurant, they are clearly buying the food, not the service involving a chef using his or her expertise to put a well tasting meal together. Viewing everything in this light, one can make an argument for virtually any item he/she buys. If you have a toothache, are you buying a professional’s expertise or the tangible cavity filling when you get your tooth fixed at the dentist? If you buy a photo, are you buying the tangible photo or the artistic service involved in taking or creating the picture? The list can go on and on.

In a 2015 example, a portable toilet company found itself in the middle of a true object argument. In the Pot-O-Gold Rentals LLC v. City of Baton Rouge, No 2014-C-2154 (La. 2015), the taxpayer was slammed with a tax bill fora transaction in which it provided a toilet plus the cleaning service on the entire transaction. The taxpayer challenged the summary judgment and won at trial. The state appealed and the appellate court reversed by ruling that the entire transaction was taxable. From there the taxpayer appealed to Louisiana’s highest court.

The Supreme Court in Louisiana ruled that this situation was unclear. Using a powerful canon of statutory construction, the court stated that in a circumstance in which taxability is debatable, taxing statutes should be narrowly viewed against the government. Interestingly, the Supreme Court went against most state’s logic by ruling that while each component of the transaction did not depend on the other and each had its own discrete value, the transaction should be viewed as a whole and it should all be nontaxable.

Although this particular case was a win for the taxpayer, a SALT practitioner can see opportunity for Louisiana to treat mixed transactions as completely taxable. Only audit companies can expect to have a mixed transaction to be viewed as one amount and they can expect the auditor to conclude on the opposite side of the taxability aisle. Next time you see the port-o-lets out on St Patrick’s Day or at the next sporting event, stop and think about whether the venue is or should be paying sales tax if they are renting the toilet along with the cleaning service. Other than the state and local tax practitioner, most people will probably conclude that thinking about sales tax really stinks.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390.

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