March 24, 2000

You request a letter ruling on behalf of *************** (Operator) regarding the application of the Massachusetts sales tax, G.L. c. 64H, to sales of the *************** (System). The System is used both to eliminate and protect against termite infestation; it includes a pesticide, delivery stations, an agreement between the provider of the System and the installer, and an installation/maintenance agreement between the installer and the customer.

FACTS

*************** (Company) provides the System to Operator, an authorized operator that under an agreement with Company installs the System. The System is an integrated pesticide service. The delivery package of the System includes stations that are comprised of three components: the station itself, two wood strips and a bait tube (hereafter "station"). [1] Generally, the stations are embedded in the ground at approximately ten foot intervals in the area to be protected. The wood strips are inserted into the station as termite bait. If insects are detected, the wood strips are transferred to the bait tube. The bait tube is a small plastic container, inserted into the station that contains ********** (the pesticide). The pesticide is ingested by the termites and eliminates the colony by inhibiting the molting process.

The Company provides both the pesticide and the components of the stations. Under the terms of the agreement between the Company and the Operator, the Company loans the stations without charge to the Operator. The Company retains all rights of ownership in the stations, which are returnable to the Company upon completion of the work for the customer or at the end of the agreement with the Operator. The Company, in turn, charges the Operator a flat fee, which includes the cost of the pesticide, for each installation based on total lineal feet of perimeter coverage. The rate varies based on the type of property (residential or commercial) and the level of service. The Operator charges a consumer a combined installation fee that includes the following services: a survey, inspection, installation, retrieval of pests, adding bait or pesticide as needed, and ongoing monitoring.

RULING

For reasons discussed below, we rule that the Operator is a service enterprise responsible for sales and use tax on the materials it buys and consumes in executing its contracts. See G.L. c. 64H, § 1 and 830 CMR 64H.1.1 .

We also rule that the transfer of the pesticide by Company to the Operator for a fee is an exempt sale pursuant to G.L. c. 64H, § 6(p)(3), which exempts, in pertinent part, sales of insecticides and fungicides, as well as "other substances commonly regarded in the same category and for the same use." No exemption certificate need be presented to claim this exemption.

In addition, we rule that the "loan" of the stations at no charge does not involve a sale of tangible personal property. Therefore, no sales tax is due on the transaction. With respect to the applicability of Massachusetts use tax, if the stations are purchased for use in Massachusetts, the Company will owe a use tax on the stations at the rate of five percent of the purchase price.

DISCUSSION

Massachusetts imposes a five percent sales tax on sales at retail of tangible personal property by any vendor in Massachusetts, unless otherwise exempt. See G.L. c. 64H, § 2. The installation of the System is a service transaction within the meaning of the Service Enterprises Regulation, 830 CMR 64H.1.1. See 830 CMR 64H.1.1(2). Under the Regulation, if the real object of the transaction is the service itself, and an inconsequential transfer of tangible personal property occurs, and the service enterprise does not separately state the purchase price of the tangible personal property on the bill to the customer, the service provider is not required to collect the sales tax on the amount it charges its customer. Rather, the service provider must pay the sales tax when it purchases tangible personal property that it will use or consume in providing the service unless the tangible personal property is otherwise exempt. See Directive 99-10 and Letter Ruling 96-4.

The Commissioner has ruled on the sale of pesticides in several letter rulings, which have concluded that pesticides are generally exempt from taxation. Section 6(p) of chapter 64H exempts, in pertinent part, "sales of fertilizer, including ground limestone, hydrated lime, insecticides, fungicides, . . . as well as other substances commonly regarded in the same category and for the same use . . .." G.L. c. 64H, § 6(p)(3). The Commissioner has previously ruled that certain pesticides and pesticide enhancers are exempt under this provision. See, e.g., Letter Ruling 94-9, citing Letter Rulings 81-34 and 82-55, and Letter Ruling 99-8. In Letter Ruling 94-9, the Commissioner confirmed that section 6(p)(3) includes not only the expressly listed items, but also other substances that are commonly regarded in the same category and for the same use. The pesticide used in the System is registered as a pesticide with the Environmental Protection Agency. Although the term pesticide is not among those expressly enumerated items in section 6(p)(3), it is "in the same category and for the same use" as other items listed in section 6(p)(3), and therefore qualifies for exemption under that provision. See Letter Ruling 99-8.

The Company's "loan" of the stations at no charge to the Operator appears not to constitute a taxable sale of tangible personal property. The stations are provided free of charge according to the contract. The contract between the Operator and the Company provides that the stations are on loan and remain the property of the Company. No separate statement and no separate charge of any kind for the loan of the stations appears on any invoices. The stations may be returned by the Operator, and may be repaired by the Company and subsequently loaned to other operators for installation. Since there is no consideration for the transfer of tangible personal property and title to the property remains with the Company, no sales tax is due and no exemption certificate need be presented.

Massachusetts imposes a use tax on the storage, use or other consumption in the commonwealth of tangible personal property purchased for storage, use or consumption within the commonwealth. See G.L. c. 64I, § 2. Whether the stations were purchased for use within the Commonwealth and subject to the use tax depends upon the facts and circumstances of the transaction. SeeG.L. c. 64I, §§ 3, 8(f). Department of Revenue Directive 87-3, Property Purchased for Use in Massachusetts, provides the specific rules to be followed to make this determination.

Conclusion

Based on the facts as you describe them, the Operator is a service enterprise that installs the System and is responsible for sales and use tax on the materials it buys and consumes in executing the contract. See G.L. c. 64H, § 1 and 830 CMR 64H.1.1 . The sale of the pesticide to eliminate termite infestations qualifies for exemption from sales tax under section 6(p)(3) of chapter 64H. With respect to the loan at no charge of the stations, the loan does not involve a sale at retail of tangible property to the Operator and, hence, is not subject to sales tax. The Company, however, must pay use tax on its stations purchased for use in Massachusetts.

Very truly yours,

/s/Frederick A. Laskey

Frederick A. Laskey
Commissioner of Revenue

FAL:DMS:jet

LR 00-6



[1] The System also includes a computer-monitoring system that captures data to optimize management and use of the System. The provision of the computer-monitoring system is a separate transaction and is not a subject of this ruling.