Tax Type
Retail Sales and Use Tax
Description
Advertising business; Film studio pre-production costs
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
06-20-1988
June 20, 1988
Re: Ruling Request/ Sales and Use Tax
Dear***************
This will reply to your letter of April 28, 1987 seeking information on the correct application of the sales and use tax to certain transactions involving advertising businesses and their clients. We apologize for the delay in providing you with this response.
FACTS
In connection with its business as a Virginia based advertising agency, the**********(taxpayer), often provides services to out-of-state clients in the production and development of media advertising. For example, in one instance the taxpayer is contacted by its out-of-state client to produce a television commercial. Typically, the taxpayer then contracts with an out-of-state film studio for the actual production of the commercial. During the course of production, the film studio will progress bill the taxpayer for certain pre-production costs such as labor, travel, props, wardrobe, set construction, film, insurance, talent, director fees, etc.
When production is completed, a video cassette of the commercial is usually shipped to the taxpayer for inspection, and subsequent duplication by a local firm. The taxpayer has been paying the tax on the total charge by the local firm for duplication of the video. The duplicate copies are then shipped by the taxpayer to television stations for airing in several markets, all located outside Virginia, with the original video cassette going to the taxpayer's out-of-state client.
Based on the foregoing, the taxpayer requests a ruling whether its purchase of advertising material, in the form of the finished video, from the out-of-state film studio on behalf of its out-of-state client, for use in the client's media advertising campaign, qualifies for exemption from the tax. Furthermore, the taxpayer asks whether any of the pre-production cost items listed above, fall within the meaning of tangible personal property for which the taxpayer must pay the tax.
RULING
Since July 1, 1986, Virginia Code §58.1-608(57) has provided an exemption from the sales and use tax for "advertising" which is defined in §58.1-602(23) of the Code 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 [is] deemed to be the user or consumer of all tangible personal property purchased for use in such advertising."
Pursuant to this new exemption, the department has recently revised VR 630-10-3 of the Retail Sales and Use Tax Regulations governing advertising, a copy of which is enclosed. §2(A) of the regulation provides that "[t]he tax does not apply to charges by an advertising business for the provision of concept, writing, graphic design, [etc...], in the development of an advertising campaign, whether or not all aspects of the campaign are actually performed by the same advertising business. For example, charges by an advertising business for concept, writing, graphic design, mechanical art, photography, and production supervision, provided by another advertising business, for use in the development of an advertising campaign are not subject to the tax." (Emphasis added)
Section 3(B) of the regulation provides further that "[c]harges by an advertising business for professional services in the development and placement of advertising in the media are not subject to the tax whether or not the advertising business, the client which contracts with such business or the advertising media itself are located in Virginia."
Section 2(C) of the regulation also provides that "[t]he tax does not apply to the total charge made by an advertising business for the creation or placement of advertising in the media, regardless of the method(s) used in computing such charge, as for example by fixed fee, hourly rate, percentage of media placed, or other method. Nor does the tax apply to handling fees or cost plus charges added to out of pocket expenses incurred by advertising businesses on behalf of their clients."
The taxpayer's purchase in this case of advertising material in the form of the finished video, on behalf of its client, is not subject to the tax since it represents the purchase of "advertising" within the meaning of the above referenced code and regulation sections. Therefore, the total charge by the out-of-state film studio for the production of the video, including charges for the pre-production items listed above, is not subject to the tax. Furthermore, the taxpayer's charge to its client for having obtained the finished video is nontaxable. It is worth noting further that neither the taxpayer's purchase nor its charge to its client for the video produced by the film studio would be taxable, even if the film studio, the taxpayer's client, and the media in which the advertisement was to be placed had all been located within Virginia.
Moreover, while the total charge by the out-of-state film studio for the finished video cassette is nontaxable, if the studio had been located in Virginia, all of its purchases of tangible personal property for use in the production of the video would have been subject to the tax in accord with the last sentence of Virginia Code §58.1-602(23), cited above. For example, all of its purchases of props, wardrobe, equipment, film, blank video cassette tapes, etc., would have been taxable. Similarly, if the taxpayer had performed its own video production work internally instead of contracting with the out-of-state film studio/ all of its purchases of such tangible items would have been taxable.
Lastly, the taxpayer is correct in paying the tax on the total charge for the duplication of the finished video. The charge for video duplication is not the charge for a professional advertising service within the meaning of the advertising exemption. In addition, the taxpayer should not pass the sales or use tax paid for such duplicate tapes on to its client as a tax. Rather, the taxpayer should take the amount of tax paid into consideration when quoting fees to its client for the provision of all its professional advertising services.
I hope that all of the foregoing has responded to your questions but let me know if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner