Sales tax laws often distinguish between taxable products and non-taxable services. For example, a pizza restaurant may have to collect sales tax on the sale of pizzas, but not on any delivery fees attached to that sale. This distinction may not always be obvious, however, and many combined product-service providers run afoul of local tax authorities on this issue.
Here is a recent example from Louisiana. The City of East Baton Rogue assesses a 2% tax on the “gross proceeds” from the sale or rental of “tangible personal property.” The city exempts most “services” from the tax.
Pot-O-Gold Rentals leases portable toilets and holding tanks to customers in East Baton Rogue. Pot-O-Gold also provides cleaning and disposal services, both for its own products and those sold by other companies. Based on its reading of local law, Pot-O-Gold collected the 2% sales tax on its toilet rentals, but not on its cleaning or disposal services, which were stated in a separate charge on customer invoices.
During a 2011 tax audit, the city of East Baton Rogue assessed Pot-O-Gold for nearly $70,000 in back sales taxes, together with penalties and interest. The city argued Pot-O-Gold read the services exemption incorrectly; any cleaning and disposal provided in connection with the rental of toilets is subject to tax. Pot-O-Gold challenged the city’s position in court.
A trial judge sided with Pot-O-Gold, but in a decision issued on Sept. 17, a divided Louisiana First Circuit Court of Appeal ruled in favor of the city. Judge Mitchell R. Theriot, writing for the majority, said since the “true object” of Pot-O-Gold’s toilet rentals was the provision of tangible property to customers, the entire transaction – including any cleaning or disposal services – was subject to local sales tax. It did not matter that the cleaning services were optional, or that Pot-O-Gold provided standalone, nontaxable services to other customers.
Judge J. Michael McDonald filed a dissenting opinion. He said the majority’s decision created “an absurd result”: Pot-O-Gold had to collect sales tax for cleaning its own toilets, but not for cleaning someone else’s. McDonald said this was inconsistent with other areas of Louisiana sales tax law. For instance, removing garbage from a dumpster is not considered a taxable event according to the Louisiana Department of Revenue. But, according to the majority, Pot-O-Gold’s services were merely “incidental” to the rental of the toilets, and therefore subject to tax.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.