If you are ever waiting in line for portable toilet facilities at the St. Patty’s Day Parade and in need of something to think about, consider the property and service you are about to use: Is it the lease of tangible personal property, the provision of a cleaning and waste removal service, or both? The Supreme Court of Louisiana grappled with this fundamental sales and use tax issue in Pot-O-Gold Rentals, LLC v. City of Baton Rouge, No. 2014-C-2154 (La. Jan. 16, 2015). Approaching the provision of toilets and services as a single transaction and finding the true object to be unclear, the court interpreted the taxing statute narrowly and ruled in favor of the taxpayer. Underlying the opinion is an unusually broad, all-or-nothing bundling approach to the taxability of goods and services provided together.
The City of Baton Rouge taxes the lease of tangible personal property but does not tax the provision of cleaning services. The taxpayer provided both: a customer could lease portable toilets, could purchase toilet cleaning services, or could lease toilets and purchase cleaning services together. There was no question that services alone were nontaxable or that the lease of toilets alone was taxable. The issue was how tax should apply when toilets and cleaning services were provided together. The taxpayer had collected tax on the charges for the toilets but had not collected tax on charges for services in such transactions.
Baton Rouge assessed sales tax on the services where toilets also had been provided. The taxpayer challenged the assessment and won summary judgment in its favor, with the trial court allowing the splitting of the transaction into taxable and nontaxable components. The Court of Appeals reversed, No. 2013 CA 1323 (La. Ct. App. 1st Cir. Sept. 17, 2014), holding that the cleaning service and toilet lease components of combined contracts could not be split and addressed separately. That court then applied the true object test to determine that the entire bundled transaction should be treated as a taxable lease.
The Supreme Court reversed in a per curiam opinion, taking the bundled approach of the Court of Appeals but reaching the opposite conclusion on taxability. The Supreme Court observed that it was unclear whether providing tangible personal property in connection with waste removal services constituted the provision of a nontaxable service, comparing the Louisiana Department of Revenue’s Revenue Rulings 06-012 (Aug. 23, 2006) (providing dumpsters with trash removal service is nontaxable) and 06-013 (Sept. 19, 2006) (providing portable toilets with cleaning services is taxable). Given that the true object of such a transaction was “debatable,” the canon of reading a taxing statute narrowly against the state and in favor of the taxpayer applied: The transaction was nontaxable.
Underlying both the Supreme Court and Court of Appeals opinions was a very broad, all-or-nothing approach to taxability. Where many states would view this type of transaction as a taxable lease of property coupled with nontaxable cleaning services that were not “necessary to complete the transaction,” the Court of Appeals bundled the transaction and the Supreme Court’s analysis took the same approach (although it reinstated the judgment of the trial court, which had taken a separated approach to taxability). In support of bundling, the Court of Appeals cited McNamara v. Electrode Corp., 418 So. 2d 652 (La. Ct. App. 1st Cir. 1982). The McNamara court had explained that the degree of separateness governs application of a “true object” analysis. It had observed that facts such as if the related purchases can be purchased separately (so that each item has value without the other) and if they are separately-stated on invoices are indicative that the related purchases should not be “bundled.” Instead, their taxability for sales tax purposes should be separately determined. The Court of Appeals in Pot-O-Gold, however, bundled the services and equipment leasing despite there being separate statement and clear separate value – after all, the toilet leasing and cleaning services could be purchased separately. The Supreme Court did not dispute this approach.
At first glance, the Pot-of-Gold decision is favorable, but it also puts taxpayers in a potentially difficult position. The application of the canon of construction against taxation is unquestionably helpful. The underlying bundled transaction approach, however, raises the stakes for taxpayers and invites tax administrators to seek to bundle service charges together with tangible personal property. Multistate taxpayers may be particularly surprised by this bundling approach. Further, treating the bundled transaction as a nontaxable service suggests that the service provider could not properly claim a resale exemption on the acquisition of the property. These difficult, fundamental sales and use tax issues could raise mischief in the years ahead.