04-24 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Internet banking; True object

Topic

Appropriateness of Audit Methodology

Exemptions

Date Issued

06-02-2004

June 2, 2004

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 sales and use tax assessment issued to *********** (the "Taxpayer"), for the period January 1998 through December 2000. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a developer of Internet banking, bill payment, and bill presentment software and services for banks and other financial institutions. As a result of the Department's audit, the auditor assessed the tax on a number of transactions associated with the Taxpayer's provision of its services. The Taxpayer disputes part of the audit assessment as time-barred under the statute of limitations, and takes exception to the tax assessed on certain transactions.

DETERMINATION

Statute of Limitations

The Department's audit covers the period January 1998 through December 2000. The Taxpayer signed the Department's waiver of time limitation form extending the period for the Department to issue an assessment until October 31, 2001. On October 28, 2001, the Taxpayer received a draft copy of the audit report from the auditor, accompanied by a letter dated October 10, 2001, indicating that the assessment would be forthcoming. The Taxpayer received the final copy of the audit report and an audit bill in a package postmarked November 6, 2001.

The Taxpayer contends that it has never received an official Notice of Assessment from the Department as required in Title 23 of the Virginia Administrative Code (VAC) 10-20-160. Because such notice was allegedly not received by October 31, 2001, the Taxpayer contends that part of the assessment is time-barred based on Va. Code § 58.1-634. The Taxpayer also relies upon the ruling in Public Document (P.D.) 97-80 (2/19/97) to support its position.

Virginia Code § 58.1-634 provides that "[t]he taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable."

Virginia Code § 58.1-1820(2) provides that "[a]ssessments made by the Department of Taxation shall be deemed to be made when a written notice of assessment is delivered to the taxpayer by an employee of the Department of Taxation, or mailed to the taxpayer at his last known address." The regulation in Title 23 VAC 10-20-160 (E)(2) further states that "[t]he date that such notice is mailed or delivered is the date of the assessment for the purpose of any limitations on the time in which administrative and judicial remedies are available and for any other administrative purposes."

It is my understanding that the auditor posted the assessment to the Department's automated accounting system on October 26, 2001, and the assessment was dated October 31, 2001. Based on the information before me, there is no evidence to suggest that an official Notice of Assessment was not mailed to the Taxpayer's last known address immediately after issuance and by October 31, 2001. The Department has in place procedures regarding the mailing of assessments to taxpayers, and these procedures were followed in this case. Accordingly, the requirements set out in Va. Code § 58.1-1820 and Title 23 VAC 10-20-160 have been met, and I find no basis for waiver of any part of the Taxpayer's assessment.

The facts in this instance are different from those in P.D. 97-80 cited by the Taxpayer. In that ruling, a taxpayer was audited for the period July 1991 through June 1994. The taxpayer signed a waiver of time limitation that extended the period of assessment to July 31, 1995. The assessment was generated on January 26, 1995, but the taxpayer did not receive the Notice of Assessment until October 30, 1995. It was determined that although the assessment was generated within the waiver deadline, the assessment was held from mailing pending the review of additional data by the Department's auditors. As such, the Tax Commissioner revised the assessment. These circumstances are not present in the Taxpayer's case.

Graphic Design Services

The Taxpayer asserts that it purchased graphic design services from one vendor for use in its newsletter and from another vendor for product packaging. In both instances, the Taxpayer contends that the only tangible personal property received is the original design work. In applying the "true object" test, the Taxpayer believes that these transactions constitute the purchase of a nontaxable service and should be removed from the audit. To further support its position, the Taxpayer cites Va. Code §§ 58.1-609.5(1), 58.1-609.10(16) and P.D. 91-268 (10/23/91).

Virginia Code § 58.1-609.5(1) provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made." Virginia Code § 58.1-609.10(16) provides an exemption for a professional's provision of original, revised, edited, reformatted or copied documents, including but not limited to documents stored on or transmitted by electronic media, to its client or to third parties in the course of the professional's rendition of services to its clientele.

In P.D. 91-268, the taxpayer is an architectural firm that provided blueprints to its clients as part of its architecture design services. The Tax Commissioner determined that the "true object" sought by the taxpayer's clients is the rendering of professional services. The provision of the blueprints by the taxpayer, whether purchased from an outside source or produced in-house, is incidental in nature when furnished to a client in connection with the architectural design work. Therefore, the blueprints were not taxable to the client.

According to the invoices, the purchases in the Taxpayer's case are for graphic design artwork and copy work that was transferred in the form of prints, film and other materials. These purchases involve both the rendering of a service and the provision of tangible personal property. I will address these transactions separately.

Newsletter: The regulation in Title 23 VAC 10-210-4040 interprets the services exemption. Subsection D addresses transactions that involve both the rendering of a service and the provision of tangible personal property. To determine the application of the tax, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. If the object of the transaction is to secure the property that it produces, then the entire charge, including the charge for any services provided, is taxable.

The Tax Commissioner applied the "true object" test to graphic design and artwork services in P.D. 01-18 (3/14/01). In that instance, a trade association purchased graphic artwork and copy for use in various publications distributed to its members. The work included concept, writing, graphic design, mechanical art, and other services related to the final product. The Tax Commissioner determined that the transactions would have been of no value to the taxpayer without the transfer of the tangible personal property, and the purchases were held taxable.

The analysis in P.D. 01-18 applies to the Taxpayer's case. Without the transfer of the prints, film and other materials, the Taxpayer would have no need for the graphic design services. This is different from the circumstances in P.D. 91-268. The "true object" sought in that instance is clearly the expertise provided in architectural design work, while in this instance, the Taxpayer sought the tangible artwork and copy work.

In addition, the exemption in Va. Code § 58.1-609.10(16) does not apply in this instance because the exemption pertains to documents provided by design professionals, e.g., engineers and architects, to their clients or third parties in the rendition of their services.

In accordance with Title 23 VAC 10-210-4040 and P.D. 01-18, the entire charge for the artwork and copy work, including the services rendered in creating such work, are taxable. This is the case even if the services, the artwork and the copy work are separately stated on the invoice, as these are services in connection with the sale of tangible personal property. Based on the above, I find no basis to remove from the audit the charges for graphic design services used in the Taxpayer's newsletter.

Product packaging: Virginia Code § 58.1-609.6(5) provides an exemption from the sales and use tax for "advertising," which is defined in § 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 herein shall be deemed to be the user or consumer of all tangible personal property purchased for use in such advertising.

The advertising regulation in Title 23 VAC 190-210-40 defines the term "media" to mean and include "newspapers, magazines, billboards, direct mail, radio, television, and other modes of communication."

The Tax Commissioner has previously determined that, in some instances, product packaging constitutes exempt media advertising. In P.D. 90-60 (4/12/90), the Tax Commissioner determined that a graphic design business provides exempt media advertising services when it provides concept and graphic design for packaging intended to convey promotional information to the public generally. The ruling goes on to state that the total charge for creative and design services resulting in a tangible product in connection with a nonmedia related project such as in the design of packaging for an in-house directory, employee handbook, in-house training manual, product manual, or other item intended to be used for some nonpromotional administrative purpose, is taxable.

In this instance, it is not clear whether the graphic design services were purchased for use in product packaging. The auditor indicates in the work papers that the services were purchased in connection with the Taxpayer's newsletter. In order to determine the proper application of the tax, the Taxpayer must provide additional information to clarify the nature of this purchase.

Commission Payment

The Taxpayer contends that it paid a commission to another party to dispose of an old telephone system. The Taxpayer believes that this constitutes payment for professional services, and the commission represents an exempt service fee.

It is my understanding that the auditor requested federal Form 1099 from the Taxpayer to confirm that the contested transaction represented a commission. The information was not provided and the auditor assessed the tax on the transaction. Unless the Taxpayer provides convincing evidence that the transaction constitutes the payment of a commission, there is no basis to remove the transaction from the audit.

Bankcard Purchases

The Taxpayer made a variety of purchases using its bankcard. Because the Taxpayer was unable to provide invoices or a bankcard statement, the auditor assessed the tax on the purchases based on the Chart of Accounts showing that the purchases were charged to the Taxpayer. The auditor assessed the tax on the purchases charged to the Taxpayer's "equipment," "office supplies," "marketing" and "maintenance supplies" accounts. The Taxpayer contends that the majority of the purchases were for trade show expenses. The Taxpayer asserts that it did not hold any tradeshows in Virginia and that tangible personal property purchased in connection with the trade shows was shipped directly from the supplier to the trade show location outside Virginia. Accordingly, the Taxpayer requests that the purchases be removed from the audit.

The Taxpayer has failed to provide documentation to support its contention that the bankcard purchases are not taxable. The auditor's procedure for applying the tax based on the Taxpayer's Chart of Accounts is reasonable, and I do not find a basis to remove the purchases from the audit.

Copies of Documents

The Taxpayer contends that it purchased the rights to reproduce a research note that it previously purchased from the vendor. The Taxpayer believes that the invoice is clear in describing the transaction as the purchase of nontaxable intangible personal property. Relying upon Va. Code § 58.1-603, which applies the sales tax to the retail sale of tangible personal property and specific services, the Taxpayer contends that the tax does not apply to this transaction and it should be removed from the audit.

The invoice in question states that the purchase is for the "[r]ights to reproduce 100 copies" of a research note. The check request documentation attached to the invoice states that the description/reason for the transaction is for reprints of certain reports. In addition, the transaction is charged to the Taxpayer's "printing charges" account. Although the wording of the invoice appears to confer an intangible right, the Taxpayer's own supporting documentation indicates that tangible reprints were purchased. In addition, it is my understanding that during the audit, the Taxpayer's representative stated to the auditor that tangible copies of a report were received as a result of this transaction.

The Tax Commissioner has previously determined in P.D. 94-135 (4/28/94) that the sale of multiple copies of documents are taxable. This is true even if the original document constituted an exempt service or a taxable sale of tangible personal property. Based on the cited authorities and the Taxpayer's own documentation of the transaction, I do not find a basis to remove the transaction from the audit.

Conclusion

The Taxpayer should provide the additional information regarding the graphic design services transaction to the auditor, ***** at the Virginia Department of Taxation, ***** within 30 days of the date of this letter. A revised bill, including any adjustment if warranted and interest to date, will be sent to the Taxpayer shortly thereafter. No additional interest or penalties will accrue provided the outstanding balance is paid within 30 days from the bill date.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding the determinations in this letter, please contact ***** in the Office of Policy Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/38608J

Rulings of the Tax Commissioner