May 3, 2016
Re: Request for Ruling: Retail Sales and Use Tax
This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to charges made by ***** (the "Taxpayer").
The Taxpayer is engaged in a photography business specializing in weddings, events and portrait packages. As an example, a wedding package typically includes a service fee for the photographer's time in taking, editing and posting pictures, a removable flash drive device containing the images, and the provision of an online service in which the Taxpayer uploads the images to an online album from which the customers can view and print selected images. When an image is selected for printing, it is printed by a third party who charges for the printing and collects sales tax on the printing charge. The Taxpayer indicates that no separate charge is made for the flash drive device.
Although the Taxpayer is registered to collect and remit the retail sales tax to the Department, no sales tax is collected by the Taxpayer on the service fees. The Taxpayer requests advice on the application of the retail sales and use tax to the flash drive device and service fees. The Department requested copies of two contracts (the current and former ones used) and the price lists but was not furnished such documentation.
Virginia Code § 58.1-603 1 imposes the sales tax on "the gross sales price of each item or article of tangible personal property when sold at retail or distributed in this Commonwealth." The term "sales price" is defined by Va. Code § 58.1-602, in part, as follows:
the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. [Emphasis added.]
The term "sale" is defined by Va. Code § 58.1-602, in part, as follows:
any transfer of title or possession, or both . . . in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication. [Emphasis added.]
Title 23 of the Virginia Administrative Code (VAC) 10-210-2050 is the Department's regulation on photographs, photostats, blueprints, etc. and sets out the following:
A. Sales. The tax applies to sales of photographs, portraits, prints, slides from camera film, photostats, blueprints, frames, camera film, etc. The tax does not apply to charges for developing films (including movie films) and coloring or tinting photographs.
The tax is applicable to the total charge to the customer for a photograph, slide, etc., including, but not limited to, charges for labor, photocomposition, setting design, photography time, and any other components of the charge, regardless of whether such components are separately stated.
The tax also applies to the total charge for aerial photographs, security photographs, audio-visual films, and similar items produced under a contractual agreement which includes design time and similar labor charges.
B. Purchases. Chemicals, paper and other materials that become a component part of the finished photograph or other print for sale may be purchased under a resale certificate of exemption. Purchases of cameras, equipment and other tangible personal property by commercial photographers and others for use or consumption are taxable. [Emphasis added.]
In addition, subsection A of Title 23 VAC 10-210-4040 provides general guidance on services as follows:
Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.Transactions involving both the sale of tangible personal property and the provision of services, generally are either taxable or exempt on the full amount charged, regardless of whether the charges for the service and property components are separately stated. As explained in subsection D of this section, the "true object" test is used to determine the taxability of these transactions.
Subsection D of Title 23 VAC 10-210-4040 provides guidance on determining the appropriate tax treatment of service and sale transactions and sets out, in part, the following:
In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, 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 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 which it produces, then the entire charge, including the charge for any services provided, is taxable.
Furthermore, subsection B (3) of Title 23 VAC 10-210-4040 specifically states that any services included in or in connection with the sale of tangible personal property are taxable.
The facts presented indicate that each customer receives some form of tangible personal property, whether it is in the form of printed images or images residing in a removable flash drive. Even if the flash drive were not furnished to customers, I find that the true object of the transaction described in the Facts Section of this determination is for the sale of tangible personal property, regardless that someone else has contracted with the Taxpayer to furnish printed images to customers. The prints and/or flash drive with images are critical to the transaction.
Based on this determination, the service fees constitute charges for services rendered in connection with the sale of tangible personal property, although a third party is the one collecting the sales tax on the printing fee. While the transaction is for a package of services and tangible personal property, a definite connection is created between the tangible personal property transferred and the services provided. Because the object of the transaction is for the sale of tangible personal property and because no statutory exemption applies in this situation, the service fees are taxable regardless of the fact that they are separately stated and invoiced.
Although no separate charge is made, the flash drive devices that are freely furnished to customers may be purchased exempt of the retail sales and use tax using a resale exemption certificate, i.e., the Department's Form ST-10. I understand that the Taxpayer will be offering tangible albums to customers of various images photographed by the Taxpayer. Such albums may also be purchased pursuant to a resale exemption certificate.
Based on all of the foregoing, all charges made to customers are subject to the retail sales and use tax. As such, the Taxpayer should be charging and collecting the retail sales tax from its customers on tangible personal property transferred to customers, as well as the service fees in question. The Taxpayer should not collect the retail sales tax on prints that are furnished by a third party directly to customers and in which sales tax is collected and remitted to the Department by such third party. In the event that the third party ceases to collect the sales tax on printing fees, the Taxpayer will become liable for collecting and remitting the sales tax on such fees. Of final importance, the contract or invoice with customers should indicate that a flash memory drive with images is included in the transaction.
I trust that the above has responded to your inquiries. This response is based on the facts provided as summarized above without review of the contracts and price lists requested. Any change in the facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns