Tax Type
Retail Sales and Use Tax
Description
Music creation charges; Video production business
Topic
Taxability of Persons and Transactions
Date Issued
09-28-1989
September 28, 1989
Re: Ruling Request/ Sales and Use Tax
Dear*************
This will reply to your letter of February 7, 1989 seeking information on the application of the sales and use tax to your video creation and production business,**********(taxpayer).
FACTS
The taxpayer scores music for videos to be aired through the mass media, as well as for use by corporations for in-house training purposes. In some cases an advertising agency contracts with you to compose, arrange and produce a jingle and in other cases you are hired directly by a client to compose, arrange and produce such a jingle. The taxpayer may also be retained directly by a client to perform all of the services that an advertising agency could perform in the development of a mass media video, such as the development of concept, lyrics, strategy, and the purchase of air time, etc.
The taxpayer is paid a "re-use" fee whenever a client or ad agency seeks to use one of its compositions beyond the terms of an original agreement. The taxpayer is also sometimes hired to compose, arrange, and produce music for a motion picture intended for theatrical release.
The taxpayer asks how the tax applies to the above described transactions and also asks whether it must pay sales tax to a recording studio when it exercises full artistic and technical control over the studio in the recording of videos it has created.
RULING
Effective July l, 1986, the tax does not apply to "advertising" which is defined in Virginia Code §58. l-602(23) as:
-
- [T]he planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting or 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.
- [T]he planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting or 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.
Under the above cited law and regulation, when the taxpayer composes music in the production of a video for use in the media, the taxpayer is providing a media advertising service, the total charge for which qualifies for tax exemption, whether the video is produced directly by the taxpayer for its own client, or for an advertising agency for subsequent provision to its client. When the taxpayer provides such a video to an advertising agency, it must receive a certificate of exemption (Form ST-10A), copy enclosed, from the agency substantiating that the video is intended for use in the media. The taxpayer need not receive such an exemption certificate when it produces such a video for its own client. It should be noted however, as indicated in enclosed VR 630-10-3, that all of the taxpayer's purchases of tangible personal property in the creation of a video for use in the media are taxable, including its purchases of blank videotapes.
The tax will also not apply to the taxpayer's charges for concept, lyrics, strategy, or for arranging air time, provided they are all provided in connection with some media advertising campaign of its client. The application of the tax to duplicate copies, or "dubs" of any video produced for use in the media was addressed in an August 26, 1988 ruling of the department, a copy of which is enclosed.
When the taxpayer composes music in the production of a video for use as an in-house corporate training film, it is not providing a media advertising service within the meaning of the above cited law and regulation. Since the true object of the taxpayer's composition in this instance is the provision of a completed video, the total charge for the video, including charges for music composition are subject to the tax under principles accepted by the Virginia Supreme Court in the case of WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E. 2d 245 (1977), copy enclosed. The total charge for such a video is taxable whether it is provided directly to the taxpayer's own client, or to an advertising agency for subsequent provision to the ad agency's client, unless the taxpayer receives a resale exemption certificate, Form ST- 10, copy enclosed, from the ad agency. The taxpayer may also purchase under resale exemption, any tangible personal property, such as blank videotapes, for use in connection with the production of such a video.
In addition, the application of the tax to either media or non-media videos produced by the taxpayer will not vary, depending on whether it conveys complete or more limited rights in the music it has produced.
The taxability of the taxpayer's "re-use" fee will depend on the taxability of the initial transaction which gave rise to the "re-use" fee. If the initial transaction involved the provision of a video for use in the media, (a nontaxable service), the tax would not apply to the subsequent "re-use" fee, provided no additional duplicate copies of the video are also provided at that time. Conversely, if the initial transaction which gave rise to the "re-use" fee was taxable, e.g., because the video was not intended for use in the media, the "re-use" fee would also be taxable, whether or not any dubs of the video are Provided at that time. This is based on the "sales price" concept set forth in Virginia Code
§58.1-602(17), copy enclosed.
The total charge for the composition, arrangement, and production of music for use in a motion picture intended for theatrical release, will be subject to the tax, if any item or items of tangible personal property are conveyed in connection with such music, such as a finished video, or completed musical score. This is also in accord with the WTAR case, cited above.
The application of the tax to charges for the taxpayer's use of a recording studio was addressed in the enclosed July 31, 1986 ruling of the department.
I hope that the foregoing and the enclosed materials have responded to all of the questions raised, but let me know if the department can be of further assistance.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner