Tax Type
Retail Sales and Use Tax
Description
Publishing and broadcasting; Internet-based newspaper
Topic
Taxability of Persons and Transactions
Date Issued
03-31-2000
March 31, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which seek correction of a retail sales and use tax assessment issued to **** (the "Taxpayer") for the period April 1996 through March 1999. The issue concerns the application of the sales and use tax to tangible personal property purchased and used by the Taxpayer to publish its Internet-based newspaper.
FACTS
The Taxpayer, a wholly-owned subsidiary of a publishing company which does business in Virginia and surrounding jurisdictions, produces a daily Internet-based newspaper which includes news stories and summaries, community information, sports and classified advertising. Some of the news and information published by the Taxpayer are provided by the parent company. In such instances, the Taxpayer collects, compiles, sorts, reformats and publishes this news and information on the Internet. In other instances, the Taxpayer generates its own unique content including news stories and summaries, community information, dining and entertainment guides and informational web sites. Remuneration for the production and publishing of the Taxpayer's unique content is derived directly through advertising revenues. Readers access the Taxpayer's content at no charge.
The Taxpayer is organized into groups, some of which function as they would at a traditional newspaper publisher. For example, the Editorial Group is responsible for researching, writing, and editing the Taxpayer's unique content. It is also responsible for importing and formatting content generated by the parent company.
Other functions, however, are responsible for Internet-related functions. The Technology Group, for example, uses switches, routers, and telecommunications equipment to ensure that the Taxpayer's product is distributed instantly to readers on a real-time basis.
You maintain that the Taxpayer's Internet-based newspaper is an exempt publication as described in Code of Virginia § 58.1-609.6(3). You further maintain that as an exempt publication, no tax applies to the Taxpayer's purchases of equipment and supplies used directly and predominantly in the creation, production and publication of its Internet-based newspaper. Alternatively, you maintain that the Taxpayer's Internet-based newspaper is an exempt audiovisual work as described in Code of Virginia § 58.1-609.6(6).
DETERMINATION
The Publication Exemption
Code of Virginia § 58.1-609.3(2)(v) provides an exemption for "equipment, printing or supplies used directly to produce a publication described in subdivision 3 of § 58.1-609.6 whether it is ultimately sold at retail or for resale or distribution at no cost." The "publication described" in § 58.1-609.6(3) is:
Any publication issued daily, or regularly at average intervals not exceeding three months, and advertising supplements and any other printed matter ultimately distributed with or as part of such publications; however, newsstand sales of the same are taxable.
In Public Document 95-30 (2/27/95), the Tax Commissioner has previously determined that "[t]he exemption for publications ... encompasses only publications in tangible form, as it is the tangible nature of property which subjects it to the sales and use tax." For several reasons, you believe that this prior determination should not be applied to the Taxpayer.
First, you maintain the statement in Public Document 95-30 - that publications include only those that are in tangible form - was not necessary to the determination. I disagree. Public Document 95-30 was issued to a taxpayer seeking a ruling on the tax status of electronic publications. It is therefore reasonable to determine what is or is not a publication for sales and use tax purposes. You also maintain that the "electronic compilations of information" addressed in Public Document 95-30 are substantially distinguishable from the newspaper published by the Taxpayer. Public Document 95-30 does not describe in detail the types of publications at issue. However, it certainly does reiterate the department's consistent policy that transactions which involve the provision of online information are nontaxable service transactions (and not the sale of tangible personal property).
Further, l am not convinced that decisions set out by the Virginia Supreme Court support your declaration that the Taxpayer's Internet-based newspaper is an exempt publication. See Jefferson Publishing Corp. v. Forst, 217 Va. 988, 234 S.E.2d (1977) and Carr v. Forst, 249 Va. 66,453 S.E.2d 274 (1995). These two cases examine the purchases of printing by specific taxpayers and used to produce tangible publications. Neither of these cases contemplates, in any way whatsoever, online Internet transactions. I am therefore reluctant to apply the court's decisions in these two "printing" cases to the purchases of computer hardware and software used to provide Internet information services.
As noted above, the department has consistently held that transactions involving information accessed via fax, Internet, or other electronic means are nontaxable service transactions. Such transactions are deemed to be nontaxable services precisely because there is no transfer of tangible personal property. This distinction between tangible and intangible property is clearly relevant in your case. You indicate, for example, that the online content of the Taxpayer's newspaper is indistinguishable from a printed newspaper, and is different only in the manner in which it is distributed. In this regard, however, the department has consistently held that identical items may be taxable or exempt based solely on how such items are distributed. Therefore, prewritten computer software distributed electronically is exempt, but the same software delivered in tangible form is taxable. Further, the regulation set out in Title 23 of the Virginia Administrative Code 10-210-765 provides that the production of computer software "in tangible form" for sale or resale is generally an exempt manufacturing activity. This regulation further provides that the industrial manufacturing exemptions do not apply to the production of computer software that does not constitute tangible personal property.
The Audiovisual Exemption
The 1995 Virginia General Assembly enacted Code of Virginia § 58.1-609.6(6) to exempt from the retail sales and use tax:
a. (i) The lease, rental, license, sale, other transfer, or use of any audio or video tape, film or other audiovisual work where the transferee or user acquires or has acquired the work for the purpose of licensing, distributing, broadcasting, commercially exhibiting or reproducing the work or using or incorporating the work into another such work; (ii) the provision of production services or fabrication in connection with the production of any portion of such audiovisual work, including, but not limited to, scriptwriting, photography, sound, musical composition, special effects, animation, adaptation, dubbing, mixing, editing, cutting and provision of production facilities or equipment; or (iii) the transfer or use of tangible personal property, including, but not limited to, scripts, musical scores, storyboards, artwork, film, tapes and other media, incident to the performance of such services or fabrication; however, audiovisual works and incidental tangible personal property described in clauses (i) and (iii) of this subsection shall be subject to tax as otherwise provided in this chapter to the extent of the value of their tangible components prior to their use in the production of any audiovisual work and prior to their enhancement by any production service; and
b. Equipment and parts and accessories thereto used or to be used in the production of such audiovisual works.
You contend that the Taxpayer's Internet-based newspaper is an "other audiovisual work" for purposes of this exemption. Accordingly, you maintain that subdivision b of the exemption applies to computer hardware, monitors and other equipment used by the Taxpayer to produce its online newspaper. You further maintain that items such as graphics, photographs, and editorial pieces purchased from third-parties are exempt to the extent that they are used in creating the online newspaper.
To support your claim, you indicate that the Taxpayer's Internet-based newspaper includes news, entertainment, community information and classified advertising. You further point out it is exhibited over the Internet and may be accessed by any Internet user. In effect, you conclude that the Taxpayer's product is an audiovisual work because: (1) it has an information-based content, and (2) it is commercially available.
I am concerned that this same conclusion can be applied to every newspaper, magazine and book. Doing so violates the clear intent of the statute - which is to encourage film production in Virginia. Further, the audiovisual exemption, like the publication exemption discussed above, exempts certain tangible personal property from the sales and use tax. Claiming that the Internet-based newspaper is an "other audiovisual work" ignores a basic principle of the Virginia Sales and Use Tax Act: It is the tangible nature of property which subjects it to the sales and use tax.
Summary
Based on this determination, the Taxpayer's Internet-based newspaper is not an exempt publication as set out in Code of Virginia § 58.1-609.6(3) or an exempt audiovisual work as contemplated in Code of Virginia § 58.1-609.6(6). The Taxpayer's provision of its online newspaper is deemed to be the provision of a nontaxable service, and the Taxpayer is the taxable user or consumer of all tangible personal property used or consumed in Virginia in the provision of its service.
Accordingly, the assessment is correct. Because of the delay in responding to your appeal, interest on the unpaid balance of the assessment has been accrued only through the date of your protest letter. No additional interest will accrue provided the assessment is paid within 30 days from the date of this letter.
If you have any questions regarding this letter, please call **** in the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24961I
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which seek correction of a retail sales and use tax assessment issued to **** (the "Taxpayer") for the period April 1996 through March 1999. The issue concerns the application of the sales and use tax to tangible personal property purchased and used by the Taxpayer to publish its Internet-based newspaper.
FACTS
The Taxpayer, a wholly-owned subsidiary of a publishing company which does business in Virginia and surrounding jurisdictions, produces a daily Internet-based newspaper which includes news stories and summaries, community information, sports and classified advertising. Some of the news and information published by the Taxpayer are provided by the parent company. In such instances, the Taxpayer collects, compiles, sorts, reformats and publishes this news and information on the Internet. In other instances, the Taxpayer generates its own unique content including news stories and summaries, community information, dining and entertainment guides and informational web sites. Remuneration for the production and publishing of the Taxpayer's unique content is derived directly through advertising revenues. Readers access the Taxpayer's content at no charge.
The Taxpayer is organized into groups, some of which function as they would at a traditional newspaper publisher. For example, the Editorial Group is responsible for researching, writing, and editing the Taxpayer's unique content. It is also responsible for importing and formatting content generated by the parent company.
Other functions, however, are responsible for Internet-related functions. The Technology Group, for example, uses switches, routers, and telecommunications equipment to ensure that the Taxpayer's product is distributed instantly to readers on a real-time basis.
You maintain that the Taxpayer's Internet-based newspaper is an exempt publication as described in Code of Virginia § 58.1-609.6(3). You further maintain that as an exempt publication, no tax applies to the Taxpayer's purchases of equipment and supplies used directly and predominantly in the creation, production and publication of its Internet-based newspaper. Alternatively, you maintain that the Taxpayer's Internet-based newspaper is an exempt audiovisual work as described in Code of Virginia § 58.1-609.6(6).
DETERMINATION
The Publication Exemption
Code of Virginia § 58.1-609.3(2)(v) provides an exemption for "equipment, printing or supplies used directly to produce a publication described in subdivision 3 of § 58.1-609.6 whether it is ultimately sold at retail or for resale or distribution at no cost." The "publication described" in § 58.1-609.6(3) is:
Any publication issued daily, or regularly at average intervals not exceeding three months, and advertising supplements and any other printed matter ultimately distributed with or as part of such publications; however, newsstand sales of the same are taxable.
In Public Document 95-30 (2/27/95), the Tax Commissioner has previously determined that "[t]he exemption for publications ... encompasses only publications in tangible form, as it is the tangible nature of property which subjects it to the sales and use tax." For several reasons, you believe that this prior determination should not be applied to the Taxpayer.
First, you maintain the statement in Public Document 95-30 - that publications include only those that are in tangible form - was not necessary to the determination. I disagree. Public Document 95-30 was issued to a taxpayer seeking a ruling on the tax status of electronic publications. It is therefore reasonable to determine what is or is not a publication for sales and use tax purposes. You also maintain that the "electronic compilations of information" addressed in Public Document 95-30 are substantially distinguishable from the newspaper published by the Taxpayer. Public Document 95-30 does not describe in detail the types of publications at issue. However, it certainly does reiterate the department's consistent policy that transactions which involve the provision of online information are nontaxable service transactions (and not the sale of tangible personal property).
Further, l am not convinced that decisions set out by the Virginia Supreme Court support your declaration that the Taxpayer's Internet-based newspaper is an exempt publication. See Jefferson Publishing Corp. v. Forst, 217 Va. 988, 234 S.E.2d (1977) and Carr v. Forst, 249 Va. 66,453 S.E.2d 274 (1995). These two cases examine the purchases of printing by specific taxpayers and used to produce tangible publications. Neither of these cases contemplates, in any way whatsoever, online Internet transactions. I am therefore reluctant to apply the court's decisions in these two "printing" cases to the purchases of computer hardware and software used to provide Internet information services.
As noted above, the department has consistently held that transactions involving information accessed via fax, Internet, or other electronic means are nontaxable service transactions. Such transactions are deemed to be nontaxable services precisely because there is no transfer of tangible personal property. This distinction between tangible and intangible property is clearly relevant in your case. You indicate, for example, that the online content of the Taxpayer's newspaper is indistinguishable from a printed newspaper, and is different only in the manner in which it is distributed. In this regard, however, the department has consistently held that identical items may be taxable or exempt based solely on how such items are distributed. Therefore, prewritten computer software distributed electronically is exempt, but the same software delivered in tangible form is taxable. Further, the regulation set out in Title 23 of the Virginia Administrative Code 10-210-765 provides that the production of computer software "in tangible form" for sale or resale is generally an exempt manufacturing activity. This regulation further provides that the industrial manufacturing exemptions do not apply to the production of computer software that does not constitute tangible personal property.
The Audiovisual Exemption
The 1995 Virginia General Assembly enacted Code of Virginia § 58.1-609.6(6) to exempt from the retail sales and use tax:
a. (i) The lease, rental, license, sale, other transfer, or use of any audio or video tape, film or other audiovisual work where the transferee or user acquires or has acquired the work for the purpose of licensing, distributing, broadcasting, commercially exhibiting or reproducing the work or using or incorporating the work into another such work; (ii) the provision of production services or fabrication in connection with the production of any portion of such audiovisual work, including, but not limited to, scriptwriting, photography, sound, musical composition, special effects, animation, adaptation, dubbing, mixing, editing, cutting and provision of production facilities or equipment; or (iii) the transfer or use of tangible personal property, including, but not limited to, scripts, musical scores, storyboards, artwork, film, tapes and other media, incident to the performance of such services or fabrication; however, audiovisual works and incidental tangible personal property described in clauses (i) and (iii) of this subsection shall be subject to tax as otherwise provided in this chapter to the extent of the value of their tangible components prior to their use in the production of any audiovisual work and prior to their enhancement by any production service; and
b. Equipment and parts and accessories thereto used or to be used in the production of such audiovisual works.
You contend that the Taxpayer's Internet-based newspaper is an "other audiovisual work" for purposes of this exemption. Accordingly, you maintain that subdivision b of the exemption applies to computer hardware, monitors and other equipment used by the Taxpayer to produce its online newspaper. You further maintain that items such as graphics, photographs, and editorial pieces purchased from third-parties are exempt to the extent that they are used in creating the online newspaper.
To support your claim, you indicate that the Taxpayer's Internet-based newspaper includes news, entertainment, community information and classified advertising. You further point out it is exhibited over the Internet and may be accessed by any Internet user. In effect, you conclude that the Taxpayer's product is an audiovisual work because: (1) it has an information-based content, and (2) it is commercially available.
I am concerned that this same conclusion can be applied to every newspaper, magazine and book. Doing so violates the clear intent of the statute - which is to encourage film production in Virginia. Further, the audiovisual exemption, like the publication exemption discussed above, exempts certain tangible personal property from the sales and use tax. Claiming that the Internet-based newspaper is an "other audiovisual work" ignores a basic principle of the Virginia Sales and Use Tax Act: It is the tangible nature of property which subjects it to the sales and use tax.
Summary
Based on this determination, the Taxpayer's Internet-based newspaper is not an exempt publication as set out in Code of Virginia § 58.1-609.6(3) or an exempt audiovisual work as contemplated in Code of Virginia § 58.1-609.6(6). The Taxpayer's provision of its online newspaper is deemed to be the provision of a nontaxable service, and the Taxpayer is the taxable user or consumer of all tangible personal property used or consumed in Virginia in the provision of its service.
Accordingly, the assessment is correct. Because of the delay in responding to your appeal, interest on the unpaid balance of the assessment has been accrued only through the date of your protest letter. No additional interest will accrue provided the assessment is paid within 30 days from the date of this letter.
If you have any questions regarding this letter, please call **** in the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24961I
Rulings of the Tax Commissioner