Tax Type
Retail Sales and Use Tax
Description
Cigarette manufacturer; video use in media advertising campaign
Topic
Appropriateness of Audit Methodology
Manufacturing Exemption
Date Issued
08-24-2004
August 24, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period September 1997 through March 2000. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a cigarette manufacturer that was audited by the Department. The Taxpayer is appealing the assessment of use tax on the purchase of a video from a specialty communications firm. The communications firm planned, designed, and created a video that outlines the company's history, products, overall image and philosophy. The video also illustrates the Taxpayer's cigarette manufacturing process. The video is shown to potential distributors of the Taxpayer's products, retail customers, and other interested parties at trade shows, plant tours, and potential retail and distribution outlets. You believe the purchase of the video is exempt from the sales and use tax.
DETERMINATION
Advertising
The Taxpayer maintains that the nature of this purchase was to obtain the design and implementation of an advertising campaign designed to promote goodwill among the Taxpayer's existing and potential customers. The Taxpayer asserts that the tangible personal property received (the video) was incidental to the media and communications expertise received from the communications firm by the Taxpayer.
Virginia Code § 58.1-609.6(5) provides an exemption from sales and use tax for "advertising," which is defined in Va. Code § 58.1-602 as:
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- 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. (Emphasis added).
Title 23 of the Virginia Administrative Code (VAC) 10-210-41 provides that "the tax does not apply to charges by an advertising business for professional services in the planning, creating or placing of advertising in newspapers, magazines, billboards, direct mail, radio, television, or other media ...." As provided in both the statute and the regulation, the sale of advertising services must be "media" advertising to qualify for exemption. "Media" is defined in Title 23 VAC 10-210-40 as "newspapers, magazines, billboards, direct mail, radio, television, and other modes of communication."
The Department's long-standing policy has been that modes of communication that disseminate information to the general public qualify as media advertising. This position is based on the statutory definition of advertising, which limits the exemption to those advertising services placed in the types of media listed. The types of media listed are all directed toward and available to the general public as a whole.
Based on the above, the video does not qualify as media advertising. The Taxpayer uses the video to promote its company and products but the video is not made available to or shown to the general public. The Taxpayer uses the video as a marketing tool with potential distributors and retailers. The audience for the information contained in the video is more limited than the broad audience required by the media advertising exemption.
Exempt Service
The Taxpayer states that the purchase of the video was incidental to the services received from the communications company. For this reason, the Taxpayer believes the transaction was the purchase of an exempt service.
When evaluating whether a transaction involving the provision of services and tangible personal property is a taxable sale or the provision of an exempt service, the Department uses a "true object" test. Title 23 VAC 10-210-4040(D) provides that in determining whether a particular transaction involving both the provision of services and the sale of tangible personal property is taxable, the "true object" of the transaction must be examined. If the true 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 true object of the transaction is to secure the tangible personal property that the services produce, then the entire charge, including services provided, will be taxable.
Although the production of a video includes a variety of personal services, the "true object" of a transaction involving the purchase of a video is to obtain a completed video. See Public Document 93-87 (3/29/93). The images and information contained in the video would not be useful without an actual copy of the video. Accordingly, the purchase of the video by the Taxpayer is not considered the purchase of an exempt service but is a taxable purchase of tangible personal property.
Conclusion
Based on the foregoing, the assessment is correct. The Taxpayer should remit payment for the current balance due of ***** to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P. O. Box 1880, Richmond, Virginia 23218-1880, Attention: *****. Payment must be made within 30 days from the date of this letter to avoid the accrual of additional interest and penalties. If payment is not received timely, an updated bill reflecting interest accrued to date and a 20 percent penalty imposed pursuant to Va. Code § 58.1-1840.1 (F) will be issued to the Taxpayer.
The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions concerning this determination, please contact ************************ at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/33168S
Rulings of the Tax Commissioner