Tax Type
Retail Sales and Use Tax
Description
Recording Studio Rental and Tangible Personal Property
Topic
Basis of Tax
Taxability of Persons and Transactions
Date Issued
08-14-2001
August 14, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment of your client, ***** (the "Taxpayer"), for the period of June 1997 through May 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of operating a recording studio that makes demo tapes and compact discs (CD's) for musicians and musical groups. The Taxpayer maintains control and operates all recording equipment in the production of the demo tapes or CD's. Generally, the transaction of renting studio time is between the record company, or producer as they are known in the recording industry, and the Taxpayer. The producer may elect to furnish its own blank tapes and CD's, or may purchase blank tapes and CD's from the Taxpayer. When the producer furnishes their tapes and CD's, they are billed for studio time only. When the Taxpayer sells blank tapes and CD's to the producer, the tapes and CD's are a separate line item on total invoice and the Taxpayer charges tax on the blank tapes and CD's only.
The Taxpayer was audited and assessed tax on total invoice charges for both studio time and tangible personal property. The Taxpayer is taking exception to the taxing of studio time. The Taxpayer believes this is the provision of a service, the charges of which are exempt from the tax. The auditor assessed the studio time as taxable services in connection with the sale of tangible personal property, i.e., demo tapes and CD's. The Taxpayer is seeking correction of the audit assessment.
DETERMINATION
Code of Virginia § 58.1-609.5(1) provides an exemption from the retail sales and use tax for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charge is made..."
In order to determine if a transaction constitutes an exempt service or the provision of tangible personal property, the department looks to the "true object" test set forth in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040.D, copy enclosed. VAC 10-210-4040.D states that "if the object of the transaction is to secure a service and the tangible personal property which 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 it produces, then the entire charge, including the charge for any services provided, is taxable."
The question of whether recording services were exempt under the true object concept was specifically addressed and found taxable by the Virginia Supreme Court in WTAR Radio-TV v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977), which dealt with the production and recording of television commercials. The Court ruled in WTAR Radio-TV that the production of commercial tapes for broadcast constituted the sale of tangible personal property to customers for purposes of the true object test, and the total charge, including studio time, would be subject to the tax.
Based on the information furnished to this office by the Taxpayer, it is apparent that there are two types of transactions taking place. First, the Taxpayer provides to its customers studio time and tapes or CD's. This situation is analogous to WTAR Radio-TV in that there is an actual exchange of tangible personal property between the Taxpayer and the producer, i.e., a demo tape or CD. It is also analogous in the fact that the Taxpayer in both cases exercised control over the equipment used in recording the tapes and provided its expertise in the recording process. For this reason, I find that when the Taxpayer provides studio time, technical expertise, and the actual tape or CD, the true object of this transaction is the provision of tangible personal property, the total charge of which is subject to the tax, whether the services are separately stated or not.
The second situation differs from the first in that the producer provides its own blank tape or CD and the Taxpayer furnishes studio time and the technical expertise to the recording process. In this situation the Taxpayer changes the form or state of the tape or CD provided by the producer. The department views this transaction as fabrication of tangible personal property. Fabrication is addressed in 23 VAC 10-210560, copy enclosed, and provides that an operation which changes the form or state of tangible personal property is fabrication. This regulation goes on to provide that the
tax applies to the total charge for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work. For this reason, I find that total charge by the Taxpayer to the producer in this second scenario would also be subject to the tax.
Based on all of the above, I find no basis for revising the audit assessment. Please forward your check in the amount of ***** to ***** Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days from the day of this letter. If you should have any questions, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/30356K
Rulings of the Tax Commissioner