Tax Type
Retail Sales and Use Tax
Description
Video production company to produce DVD subject to sales and use tax
Topic
Clarification
Date Issued
06-08-2005
June 8, 2005
Re: Request for Ruling: Retail Sales and Use Tax
Dear ************:
This will reply to your letter in which you request a ruling on the application of retail sales and use tax to video production services purchased by your company, ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer purchased an interactive training and technical support DVD and copies from a video production company. The DVD is a combination of text, computer graphics, pictures, sound, and digital video images. The Taxpayer provided the video production company with software animations as part of the source material for the DVD. The DVD and copies purchased from the video production company were subsequently transferred to the United States Navy for use in training of ship personnel. The Taxpayer questions whether charges for the services provided by the video production company to produce the DVD are subject to sales and use tax.
RULING
Video Production
The Department has issued several public documents that address the application of the sales and use tax to charges for video production services. Public Document (P. D.) 93-87 (3/29/93) discusses a video production company that produced videotapes on technical subjects. The video production company provided engineering, technical consulting, professional narration, music dubbing, camera operation, graphics, editing, scriptwriting and many other services in connection with the production of videos. The taxpayer in this determination maintained that the charge for the videotapes it produced were for professional services that qualified for exemption from the sales and use tax under Va. Code § 58.1-609.5 1.
The Department determined in P. D. 93-87 that the video production services were taxable based on the application of the "true object" test. The Department uses the true object test to determine if a transaction that involves both the rendering of a service and the provision of tangible personal property is an exempt service or a taxable retail sale. If the "true object" of a transaction is to obtain the tangible personal property transferred to the customer, the cost of the property and the services provided in connection with the property transferred are subject to the sales and use tax. The Department has historically treated the production and sale of videotapes as taxable retail sales because the true object of the transaction is to obtain the finished videotape. Thus, any services provided in connection with the sale of the videotape are part of the taxable sales price. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 provides additional information about the taxation of services and the true object test.
Custom Software
The Taxpayer states that Department personnel indicated in phone conversations that the video production services at issue were custom computer software. The Taxpayer maintains it was informed that charges for custom computer programs are exempt from sales and use tax and that the charges for the development and production of a DVD-based training video qualified for this exemption.
In this case, the Taxpayer did not purchase a custom computer program. The Taxpayer purchased a customized training video that was recorded onto computerreadable media. The Taxpayer provided software animations that it developed for incorporation in the training video by the video production company. Therefore, the services provided by the video production company are not a custom computer program. Based on the above, the DVD-based training video does not qualify for exemption as a custom computer program. I regret that the Department may have provided the Taxpayer with incorrect information in this regard. Nonetheless, taxpayer reliance on advice given by Department personnel is no excuse unless the advice is in writing and meets the tests of Va. Code § 58.1-1835.
Government Contractors
The application of the sales and use tax to government contractors is addressed in Title 23 VAC 10-210-693. This regulation states that the tax treatment of government contractors depends upon whether the contract is for the sale of tangible personal property or for the provision of exempt services. Contractors may purchase tangible personal property under a resale exemption if the contract is for the sale of tangible personal property to a government entity. The subsequent sale of the property to the government entity would also be exempt from the tax. A contractor that provides services to a government entity is considered the taxable user or consumer of the tangible personal property purchased and used to provide its services, even when title to any property provided passes to the government.
Conclusion
The Taxpayer indicates in correspondence with the Department that the DVD training videos were provided as part of a larger services contract with the United States Navy. Based on the above, the Taxpayer should pay the applicable sales or use tax on purchases of tangible personal property used in the performance of a services contract with the government. Thus, the purchase of the DVD-based training video would be subject to sales tax on the total sales price (including production services) charged by the vendor. On the other hand, the Taxpayer may purchase the same video and related production services exempt of the tax if the contract with the United States Navy is for the procurement of tangible personal property (i.e., the sale of the DVD-based training video). The Department has issued a number of public documents that discuss the application of sales and use tax to government contractors, including Public Documents 95-333 (12/29/95), 98-182 (10/30/98) and 94-155 (5/23/94).
This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The public documents and the regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions or wish to discuss the information in this letter, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/53165S
Rulings of the Tax Commissioner