Tax Type
Retail Sales and Use Tax
Description
Archivist: Scanning and image editing services from third party
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
12-19-2001
December 19, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the period August 1995 through February 1998. Based on the circumstances surrounding this matter, I am treating your letter as an appeal in accordance with Code of Virginia § 58.1-1821. I apologize for the delay in the department's response.
FACTS
The Taxpayer provides corporate histories and archival services to national and international businesses. In order to provide services to its clients, the Taxpayer purchases certain scanning and image editing services from third party vendors. Such services involve the transfer of information to the Taxpayer via computer diskette.
The department's auditor assessed the use tax on the purchase of the scanning and image editing services from third party vendors. The Taxpayer disagrees and contends that the "true object" of its purchases is to acquire a nontaxable service. Further, the Taxpayer contends that applying the tax to the purchases at issue is inconsistent with the exemptions provided for custom programs and media advertising.
DETERMINATION
Services Exemption
Code of Virginia § 58.1-609.5(1) provides an exemption from the sales and use tax for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ...."
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 interprets the exemption and sets out the application of the "true object" test when a transaction involves both the rendering of a service and the provision of tangible personal property. The regulation provides that if the object of the transaction is to secure a service and the tangible personal property that is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
The scanning services are provided when a client's paper historical documents are scanned into a computer database program file. Upon scanning, the documents are encoded as digitized computer images in the database file. The database information is provided to the Taxpayer via diskette, along with the source materials that were scanned. No separate charge is made for the diskette.
The image editing services involve digitized optical images, that may or may not have been created through scanning, that are converted and/or edited to correct text conversion errors. The source material is delivered to the vendor via diskette and the converted/edited information is returned to the Taxpayer via diskette. No separate charge is made for the diskette.
In each instance, the Taxpayer seeks from its vendors the conversion of information from one medium or format to another that is then provided to the Taxpayer on a diskette. The "true object" sought by the Taxpayer is to obtain the diskette that contains the converted information. The diskette is critical to the transaction and without it the conversion services provided by each vendor would be of no use to the Taxpayer. Therefore, when the vendor provides the converted information in tangible form (i.e., on a diskette), the total charge is subject to tax.
Further, the department has consistently held that the conversion of data or text from one medium to another constitutes taxable fabrication. Title 23 VAC 10-210-560 defines the word fabrication to mean any "operation which changes the form or state of tangible personal property." The transfer of converted information onto a diskette constitutes a change in the form and state of the diskette. As fabrication, this renders the charge for the transaction taxable. Therefore, the auditor properly assessed the tax on the Taxpayer's purchases of the scanning and image editing services.
The department has addressed the application of the tax to conversion services in a number of prior rulings. I am enclosing Public Document (P.D.) 86-22 (1/16/86), P.D. 94-12 (1/11/94), and P.D. 96-222 (9/11/96). Please note that P.D. 96-222 addresses a CD archiving service similar to the service provided by the Taxpayer.
Custom Program Exemption
Code of Virginia § 58.1-609.5(7) provides an exemption for custom programs as defined in § 58.1-602. The statute defines a custom program to mean "a computer program which is specifically designed and developed only for one customer.
The above exemption does not apply to the services purchased by the Taxpayer. While the vendors in each instance may be providing computerized services, they are not developing a custom program specifically for the Taxpayer.
Media Advertising Exemption
Code of Virginia § 58.1-609.6(5) provides an exemption for advertising as defined in § 58.1-602. The statute defines advertising to mean "the planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting and other media, including, without limitation, the providing of concept, writing, graphic design mechanical art, photography and production supervision."
According to the auditor, the Taxpayer purchased the conversion services for use in the provision of archival storage and management services. The Taxpayer has presented no evidence that these services constitute media advertising. Because the conversion services were not purchased for use in exempt media advertising, the above exemption does not apply in this instance.
Summary
The "true object" sought by the Taxpayer is to obtain the computer diskette that contains the converted information. The transfer of the converted information on the diskette constitutes fabrication and total charge from the vendors to the Taxpayer is subject to the tax.
The department's assessment is correct and is due and payable. The Taxpayer will shortly receive an updated bill including accrued interest. The bill must be paid within 30 days of the bill date to avoid the accrual of additional interest charges. If you have questions concerning this letter, you may contact ***** Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/20614J
Rulings of the Tax Commissioner