Tax Type
Retail Sales and Use Tax
Description
"Sales Price"; Services
Topic
Taxability of Persons and Transactions
Date Issued
10-25-1984
October 25, 1984
Re: §58-1118 Application/Sales and Use Tax
Dear **************
This will reply to your letter of September 4, 1984 in which you submit an application for correction of a sales and use tax assessment issued to ***** as the result of a recent audit.
FACTS
***** (hereinafter "Taxpayer") is engaged in the operation of an audio production studio. The taxpayer, in conjunction with its customers, produces sound tracks. In some cases, the taxpayer's customers provide their own scripts and talent and make all major production decisions while the taxpayer provides its expertise and produces videotapes. In other instances, the taxpayer provides scripts, talent, sound effects, etc. in addition to its production of finished tapes.
A recent audit of the taxpayer produced an assessment for the failure to charge the sales tax on the total charge for producing videotapes. Rather, the taxpayer charged tax based on the value of the actual tangible personal property sold. The taxpayer contests this assessment, asserting that it provides a personal service to its customers that is not subject to the sales and use tax. In addition, the taxpayer asserts that the tax was administered based upon information provided by the department.
DETERMINATION
§ 58-441.3(b) of the Code of Virginia sets forth the definition of the term "sales price," upon which the sales and use tax is based, as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale... 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."
Based upon the foregoing, a transaction involving the sale of tangible personal property and the provision of service is subject to the sales and use tax based upon the total charge for property and services unless the transaction is deemed to be exempt from the tax under the provisions of Virginia Code § 58-441.6(a). In the instant case, the taxpayer charges its customers a fee based upon the cost of materials used and the amount of studio time and services used. Therefore, the sales tax should be charged to customers based upon the total charge, including fees for studio time and services rendered by the taxpayer, unless the exemption noted above is found to be applicable.
Virginia Code § 58-441.6(a) provides an exemption from the tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made." In interpreting the provisions of this exemption, the Virginia Supreme Court has adopted the "true-object" test, see WTAR Radio - TV Corporation v. Commonwealth, 217 Va. B77, 234 S.E. 2d 245 (1977), i.e. "if the "true object" sought by the buyer is the services per se, the exemption is available, but if the true object of the buyer is to obtain the property purchased by the service, the exemption is not available," 217 Va. at 883.
It is obvious in this case that without a finished product, the services rendered by the taxpayer would have no commercial value and without a product it is unlikely that customers would have sought the taxpayer's services. Therefore, it is improbable that the true object of the taxpayer's customers is to obtain the taxpayer's services.
In applying the true object test to a set of circumstances analogous to those of the taxpayer here, the court found in WTAR that the customers of a television station were more interested in obtaining a finished film than in obtaining personal services, stating "[t]o be sure, the customer obtained the technical expertise of the production personnel, but some service is involved in the production of every article that is sold," 217 Va. at 883.
Lastly, it has been asserted that the taxpayer administered the sales tax during the audit period based upon information provided by the department. I regret that such information was provided to the taxpayer; however, policy in this area has been well established since the WTAR opinion in 1977. It should be noted that the letter which the taxpayer received a copy of was written in 1975, prior to the WTAR opinion.
Therefore, based upon the foregoing, I must consider the assessment issued to the taxpayer to be correct and payable.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner