You request a letter ruling on behalf of *************** [Test Administrator] regarding the sales and use tax treatment of certain testing materials [PT Materials] transferred by Test Administrator to pathology laboratories [Facilities] in Massachusetts in connection with proficiency testing services provided by Test Administrator. In support of your request, you represent the facts as follows:
Test Administrator is a membership organization exempt from payment of federal income tax under section 501(c)(6) of the Internal Revenue Code of 1986, as amended [ the Code]. Test Administrator is a not-for-profit corporation formed under the laws of Illinois and is headquartered in Illinois. It also has an office in Washington, D.C. Test Administrator has no office or other facility in Massachusetts. Test Administrator recently registered with Massachusetts to collect use tax pursuant to a voluntary disclosure agreement reached through the Multistate Tax Commission's National Nexus Program. One of the terms of Test Administrator's agreement was that it would treat the transfer of PT Materials as a taxable retail sale. However, Test Administrator reserved the right to file a follow-up ruling request seeking a determination as to the Massachusetts sales and use tax treatment of its testing program.
Under federal law, every Facility in the United States must be accredited periodically by the Department of Health and Human Services (HHS) or another organization recognized by the HHS as having standards that are equivalent to or more stringent than federal accreditation standards. In order to obtain accreditation, a Facility must meet certain prescribed standards, undergo an on-site inspection, and participate in a testing program, described more fully below. The testing program tests Facilities to determine whether they meet these standards.
Test Administrator is one of the entities that HHS has recognized for the purpose of accrediting a Facility. While many of Test Administrator's customers are exempt from federal income tax under I.R.C. § 501(c)(3), an increasing percentage of the Facilities it tests are not exempt under this provision.
Historically, Test Administrator conducted accreditation inspections of Facilities solely with unpaid volunteer inspectors and unpaid regional coordinators. Test Administrator provides training to the volunteer inspectors in Illinois and other states. The volunteer inspectors are reimbursed for expenses incurred in conducting the inspections. Regional Coordinators are reimbursed for expenses incurred in carrying out their administrative functions. These expenses include some portion of each coordinator's rent and secretarial expenses properly allocable to administering the accreditation region.
Recently, Test Administrator hired three employees who are not Massachusetts residents. After receiving training, these employees conduct on-site inspections of Facilities in a majority of States. Test Administrator recently assigned several individuals to manage relations with key clients, and those persons have begun to travel on an occasional basis to various states to visit those clients. Test Administrator's employees may also travel infrequently to Massachusetts to meet with government officials to discuss accreditation-related issues.
The Testing Program
In order to obtain accreditation, a Facility must, inter alia, participate in a testing program. A proficiency testing program evaluates the ability of participating Facilities to perform accurate diagnostic services. Specifically, the testing program involves (i) the transfer to a participating Facility of a specimen ( i.e., the PT Materials), the composition of which is unknown to the Facility; (ii) the analysis of the PT Materials by the Facility and transmission of the Facility's findings to Test Administrator; and (iii) the processing and evaluation of the Facility's findings by Test Administrator.
Most of the PT Materials consist of a human serum or other biologic base that is "spiked" with the analytes for which each participating Facility must test. Test Administrator does not produce its own PT Materials. Instead, it acquires them from manufacturers who either 1) ship the materials directly to participating facilities, or 2) ship the materials to repackagers retained by Test Administrator in five different states. The manufacturer invoices Test Administrator for the PT Materials at the time the manufacturer ships the PT Materials to the repackager or directly to the Facilities. The repackager breaks down the manufacturer's bulk shipment into individual packages for shipment to the Facilities, adds printed instructions supplied by Test Administrator, and then ships the materials by U.S. Mail or by common carrier to the participating Facilities. Until shipment, PT Materials are stored either by the manufacturer or the repackager. Test Administrator causes the materials to be shipped in interstate commerce to participating Facilities.
Each Facility has no independent use for the PT Materials apart from participating in the testing program. Once it has concluded its analysis, it generally disposes of those materials. The Facility sends a report of its analysis to Test Administrator at its headquarters in Illinois where Test Administrator reviews it. Test Administrator evaluates each Facility's analysis, and provides its findings to the Facility and to the accreditation organization designated by the Facility.
Test Administrator charges Facilities a single subscription amount for participating in the testing program. No separate charge is made for the PT Materials and testing service. On average, the cost to Test Administrator of the PT Materials has been historically about 45% of the amount it invoiced customers for providing the testing service. You indicate that this percentage has been decreasing recently, and that this year it is expected to be approximately 35% of the invoiced amount.
From time to time, Test Administrator also sells PT Materials to Facilities (without providing testing services) as replacements of PT Materials that were lost or broken prior to or during a testing process. The total sales of PT Materials apart from the testing program are equal to approximately 0.6% of Test Administrator's total receipts from the testing program.
The specific testing modules in which a Facility will enroll depend on the scope of the work done at the Facility. Thus, a Facility performing a wide range of analyses will participate in a larger number of modules than a Facility doing only basic testing. Each specific testing module is priced separately.
- Is Test Administrator subject to Massachusetts use tax on PT Materials shipped by common carrier to Massachusetts Facilities from outside Massachusetts for its use in providing its proficiency testing services?
- If Test Administrator is subject to use tax on PT Materials shipped to Massachusetts Facilities by common carriers from outside Massachusetts, is Test Administrator entitled to a credit for tax properly paid to the state from which the materials were shipped?
- Are Test Administrator's transfers of PT Materials taxable retail sales of tangible personal property in Massachusetts or, alternatively, are they consequential or inconsequential elements of a nontaxable service transaction? If the transfers of PT Materials are part of a nontaxable service transaction, what is the proper tax treatment of such transfers?
For reasons discussed below, we rule as follows:
- Test Administrator is liable for use tax on its purchases of these materials. First, Test Administrator makes a use of PT Materials in Massachusetts by effectuating their delivery into Massachusetts for purposes of conducting its commercial enterprise here. Second, its overall activities in Massachusetts are sufficient to satisfy U.S. Constitutional Commerce Clause requirements ( i.e. physical presence) for sales and use tax nexus. Accordingly, it must pay use tax on its purchases of the above described PT Materials.
- Test Administrator is entitled to a qualified exemption from the Massachusetts use tax for tax properly paid to the state from which the materials were purchased, assuming that all of the conditions in section 7(c) of chapter 64I have been met;
- With the exception of those PT Materials that are sold to Massachusetts facilities without providing testing services (which would be subject to sales tax),Test Administrator's transfers of PT Materials are not taxable retail sales of tangible personal property in Massachusetts. Therefore, the rules governing sales of tangible property sold as consequential or inconsequential elements of a nontaxable service transaction do not apply.
The Massachusetts use tax, codified under G.L. c. 64I, § 2, imposes "an excise . . . upon the storage, use or other consumption in the commonwealth of tangible personal property purchased from any vendor for storage, use or consumption within the commonwealth at the rate of five per cent of the sales price of the property." A statutory "use" is defined to "mean and include (i) the exercise any right or power over tangible personal property incident to the ownership of that property. . . ." G.L. c. 64I, § 1. The use tax and the sales tax, taken together, are complementary components of a unitary taxing program intended to "reach all transactions, except those expressly exempted, `in which tangible personal property is sold inside or outside the Commonwealth for storage use, or other consumption within the Commonwealth. . .'" Commissioner of Revenue v. J.C. Penney Company, Inc., 431 Mass. 684 (2000) (other citations omitted).
Broken down to its individual components, the use tax is imposed upon tangible personal property that (1) is stored, used or otherwise consumed in the Commonwealth; (2) is purchased from any vendor; and (3) was purchased for storage, use, or consumption within the Commonwealth. The statutory test requires that an exercise of a right or power incident to ownership of tangible personal property, such as control, occur in Massachusetts. See J.C. Penney Co., Inc., v. Commissioner of Revenue, A.T.B. Docket No. F239834 (Jan. 29, 1999), reversed on other grounds, Commissioner of Revenue v. J.C. Penney, 431 Mass. 684 (2000). See also Hart & McGinley v. Commissioner of Revenue, 431 Mass. 684 (2000) A.T.B. Docket No. F233702 (Aug. 5, 1998); Morton Buildings, Inc. v. Commissioner of Revenue, 43 Mass. App. Ct. 441, 444 (1997).
The element which requires the exercise of a right or power over property, interpreted according to the usual and ordinary meaning of the words, contemplates some degree or form of activity with respect to the subject property. J.C. Penney, 431 Mass. 684 (2000). Moreover, the acts constituting the exercise of rights and powers over property must occur within the Commonwealth in order to make out a taxable "use." Id. However, it is not necessary that the taxpayer itself directly perform these acts in order for a taxable "use" to occur. This requirement may be satisfied where another possesses and acts on property in the Commonwealth at the taxpayer's direction." Id., citing e.g., New York Times Co. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 177, 89-90, (1997), aff'd 427 Mass.
399 (1998) (non-Massachusetts taxpayer directing travel activities of an aircraft situated in Massachusetts was engaged in use of property in the Commonwealth).
A. Test Administrator's use of PT Materials in Massachusetts
Based on the facts as you state them, we conclude that Test Administrator's shipment of PT Materials to Facilities in Massachusetts by common carrier from manufacturers or repackagers located outside Massachusetts constitutes a "use" by Test Administrator under Massachusetts law for two reasons. First, Test Administrator makes a use of the materials in Massachusetts when it effectuates the delivery of the testing materials to locations within the Commonwealth for purposes of conducting its commercial business with Massachusetts Facilities. In J.C. Penney, the Massachusetts Supreme Judicial Court (SJC) held that an out of state taxpayer's distribution of merchandise catalogues to Massachusetts by means of interstate mail for the purpose of soliciting retail business a taxable "use" of the catalogues in Massachusetts. By effectuating the delivery of the catalogues via interstate mail to Massachusetts addressees, the SJC concluded that the taxpayer exercised substantive rights and powers over the catalogues in the Commonwealth sufficient to find a taxable use here. Citing the Massachusetts Appellate Tax Board's own prior construction of G.L. c. 64I, § 2, the SJC found that this indirect taxpayer control of the catalogues was indistinguishable from the control the taxpayer would have exercised had it chosen to ship the catalogues into Massachusetts and to effectuate their delivery by a common carrier or its own employee. Here, Test Administrator effectuates delivery of the PT Materials to Massachusetts either directly through a manufacturer or via a repackager. In either case, Test Administrator's deployment of the PT Materials in this manner is a "use" of the materials in Massachusetts under the reasoning of JC Penney.
Second, in JC Penney, the SJC found that the taxpayer made a taxable use of the catalogues on the separate ground that the term "use" in G.L. c. 64I, § 2 encompasses a "commercial utilization of direct mail catalogues and like promotional materials to conduct business in Massachusetts markets." Id., at 691, citing New York Times Co. v. Commissioner of Revenue, 22 Mass. App. Tax Bd. Rep. 177, 191 (1997), aff'd, 427 Mass. 399 (1998). Here, the PT Materials are purchased by Test Administrator outside Massachusetts for its own use in conducting its proficiency testing business with Massachusetts Facilities. These materials, like the catalogues at issue in JC Penney, supra, are "intended to, and do, serve as an instrument in the conduct of [Test Administrator's] commercial enterprise in Massachusetts." Id. 691. In fact, the PT Materials are an essential instrument in Test Administrator's administration of the proficiency test to Massachusetts Facilities. Without them, Test Administrator could not provide its testing and analysis services to them. The Facilities, in turn, would be unable to obtain the federally mandated proficiency testing required for accreditation.
The degree of control exercised by Test Administrator over the PT Materials in Massachusetts is also a relevant criterion in determining whether a use occurs here. See New York Times Co, supra. Massachusetts Facilities must follow specific procedures dictated by Test Administrator in performing the tests. Like the control exerted by the out of state taxpayer over an aircraft situated in Massachusetts in New York Times Co., Test Administrator here exerts specific control over the use of PT Materials by Facilities in Massachusetts.
For the above reasons, we rule that the PT Materials are "used" by Test Administrator in Massachusetts, within the meaning of G.L. c. 64I, § 2.
B. Test Administrator's liability for Massachusetts use tax
In order to impose use tax liability on Test Administrator, its activities in Massachusetts must be sufficient to satisfy U.S. Constitutional sales and use tax nexus requirements. Under the Commerce Clause of the U.S. Constitution, a taxpayer must have "substantial nexus", which has been defined as having a physical presence. J.C. Penney at 690, fn. 5, citing Quill Corp. v. North Dakota, 504 U.S . 298, 311 (1992); National Bellas Hess, Inc. v. Dep't of Revenue of Ill. 386 U.S. 753, 759 (1967).
To the extent that Test Administrator's employees perform activities in Massachusetts that provide substantial physical presence required by the U.S. Supreme Court in Quill, Test Administrator has nexus with Massachusetts for sales and use tax purposes. Under the facts presented here, we conclude that on-site inspection of various Massachusetts Facilities by Test Administrator's employees while in Massachusetts, as well as the presence of employees in Massachusetts to manage relations with key clients or to meet with government officials to discuss accreditation-related issues provide the requisite substantial physical presence.
Although Test Administrator is subject to Massachusetts use tax on the PT Materials shipped to Massachusetts Facilities (whether directly by the Manufacturer or via a repackager), Test Administrator may be entitled to a qualified exemption from the use tax for any tax paid or reimbursed to a vendor or retailer from the state from which the PT Materials are purchased. See G.L. c. 64I, § 7(c ). That provision exempts from the use tax "[s]ales upon which the purchaser has paid a tax or made reimbursement therefor to a vendor or retailer under the laws of any state or territory of the United States, provided that such tax was legally due without any right to a refund or credit thereof and that such other state or territory allows a corresponding exemption with respect to the sale or use of tangible personal property or services upon which such a sales or use tax was paid to this state." The amount of the exemption is the amount of the tax paid to the other state, not to exceed the tax imposed on the sale under G.L. c. 64I, § 7(c).
Massachusetts imposes a five-percent sales tax on sales at retail of tangible personal property and telecommunications services by any vendor in Massachusetts. See G.L. c. 64H, § 2. We conclude that, with the exception of those PT Materials that are sold to Massachusetts Facilities without providing testing services (which would be subject to sales tax), there is no taxable sale of tangible personal property (i.e., PT Materials) in Massachusetts under G.L. c. 64H. Accordingly, with the limited exception just noted, the sales tax is inapplicable to the facts presented here. The transaction you describe is subject to Massachusetts use tax.
Very truly yours,
/s/Frederick A. Laskey
Frederick A. Laskey
Commissioner of Revenue