Tax Type
Retail Sales and Use Tax
Description
Design services for promotional use on a web site
Topic
Appropriateness of Audit Methodology
Documents Subject to Tax
Date Issued
04-05-2002
April 5, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter in which you seek correction of the sales and use tax assessment issued to ***** (the "Taxpayer") for the period October 1996 through September 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an advertising agency that provides graphic design, copy writing, and other services for media and non-media advertising. As a result of the department's audit, the Taxpayer contests the tax assessed on certain untaxed sales and purchases. The Taxpayer has paid the assessment and requests a refund of a portion of the tax paid. I will address the issues raised by the Taxpayer as presented.
Web Site Design
The Taxpayer provided the design of a web site that advertised its client's services and price schedule. The graphic designs were delivered to the client on disk. The auditor viewed the provision of the design services similar to designs provided for use on business cards or in any other non-media advertising, and assessed tax on the charge to the client. The Taxpayer contends that its provision of design services for promotional use on a web site is media advertising. The Taxpayer cites Public Document (P.D.) 97-446 (11/7/97) to support its position.
Code of Virginia § 58.1-609.6(5) provides an exemption from the sales and use tax for "advertising," which is defined in Code of Virginia § 58.1-602 as, "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. Any person providing advertising as defined shall be deemed to be the user or consumer of all tangible personal property purchased for use in such advertising."
Title 23 of the Virginia Administrative Code (VAC) 10-210-40 provides that the term "media " applies to newspapers, magazines, billboards, direct mail, radio, television, and other modes of communication. The department's longstanding policy has been that modes of communication which disseminate information to the general public qualify as media for purposes of the advertising exemption.
In P.D. 97-446, a marketing consultant wrote, designed and produced advertisements for an annual conference. The Tax Commissioner determined that the advertisements promoting the conference, other events, or services placed on a web site qualified as media advertisements. Based on the prior determination, I agree that the Taxpayer's provision of graphic design services for use in promotional advertising on a client's web site constitutes media advertising. The charge for such services will be removed from the audit.
Poster Design
Sales
The Taxpayer performed design and layout for posters for a bank. The posters were produced for display on a university campus to advertise the locations of the bank's new automatic teller machines (ATMs). The auditor viewed the work to be similar to the sale of printing and applied the tax to the charges. The Taxpayer believes the posters were used in exempt media advertising, similar to billboards and other advertisements intended for public consumption.
A similar set of facts were reviewed in P.D. 90-105 (7/3/90). The ruling addressed a free-lance commercial artist who specialized in graphic design and provided mechanical artwork to a publisher/printer for use in developing a promotional brochure for a bank for free distribution to the public. Based on the definition of advertising, the taxpayer in that prior determination was found to provide an exempt advertising service when it provided mechanical artwork for use in the creation of a bank's promotional brochure. Similarly, I find that the Taxpayer in this case provides exempt advertising services when it provides the design and layout for posters used to advertise the locations of the bank's ATMs. The charges for these services will be removed from the audit.
Purchases
The Taxpayer purchased printing in the development of posters for clients that are federal credit unions. The posters promoted each credit union's services to its members and were placed in the lobbies of the respective credit unions. The auditor determined the posters were provided for use in media advertising and applied the tax to the printing purchases. The Taxpayer contends that the posters do not constitute media advertising because of the restricted membership of credit unions. The Taxpayer purchased the printing under a resale certificate of exemption and believes it is not subject to the tax on the printing used in the production of the posters.
Credit unions limit their membership and provision of services to individuals who share a common bond, such as employment with a specific company or agency. Generally, individuals falling within the selected membership would visit a credit union lobby. The regulation applies the term "media" to modes of communication that disseminate information to the general public. Because the general public is not likely to visit a credit union lobby, the posters provided in this instance do not qualify as exempt media advertising. Therefore, the Taxpayer in producing the posters for sale to the end users, the credit unions, was entitled to purchase the printing (a component of the posters) pursuant to the resale exemption. See Code of Virginia § 58.1-602, definition of retail sale. The tax on the purchases of printing for posters provided to the credit unions will be removed from the audit.
This conclusion is supported by the decision in P.D. 98-32 (2/23/98), which addressed the design and printing of informational mailings sent to customers of banks. The Tax Commissioner determined that the customers of a specific bank constitute a limited audience and the mailings did not qualify as exempt media advertising. The determination also noted that printed letters that were not targeted to bank customers, but to the general public, were media advertising.
In accordance with the determinations rendered, the Taxpayer will receive a revised audit report and a refund of the tax paid in regard to the issues addressed in this letter. The refund will include interest accrued from the date of payment of the tax.
The Code of Virginia, regulations and public documents are cited for reference purposes. These and other reference documents are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
If you have additional questions, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/26313J
Rulings of the Tax Commissioner