Tax Type
Retail Sales and Use Tax
Description
Video production; Leaseback transactions
Topic
Exemptions
Date Issued
10-23-1991
October 23, 1991
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear********************
This will reply to your letter of July 25, 1991 in which you seek correction of a sales and use tax assessment on behalf of your client, ************** (the "Taxpayer"), for the period June 1, 1984 through April 30, 1988.
FACTS
The Taxpayer is engaged in video production and in the uplinking of television programs to satellites for ultimate distribution to cable television systems. Its facilities are also used in the production of advertising or promotional tapes for its customers. The Taxpayer contests all four issues raised in the audit including: (i) the tax on fixed assets and expensed purchases; (ii) untaxed sales; (iii) sales tax collected but not remitted; and (iv) alleged double taxation on sales and leaseback transactions.
DETERMINATION
I will address each of the above issues separately below:
Tax on fixed assets and expensed purchases: The Taxpayer maintains that a small portion of these purchases are taxable yet another small portion was incorrectly taxed as they represent purchases for resale. The majority of the items held taxable are payments made for the purchase or rental of equipment used in the Taxpayer's business. The Taxpayer maintains that the purchases are exempt from the tax because the equipment is used directly in broadcasting and/or manufacturing.
To support your contention that the Taxpayer is a broadcaster, you provide documents from the City which indicate that the locality holds the Taxpayer out as a "broadcaster." You further maintain that to the extent that any piece of equipment is used directly in broadcasting, that portion of the purchase or lease payment for the equipment is exempt from tax.
The Taxpayer transmits live and taped programming via an unscrambled signal from its facility to a telecommunications satellite. The satellite subsequently transfers the signal to the air waves. The Taxpayer maintains that the signal from the satellite is intended not only for cable TV providers but also for individuals who own a satellite receiving dish. Since the signal transmitted is unscrambled, any individual who owns the proper equipment can receive some of the Taxpayer's broadcasts.
Va. Code §58.1-608(A)(6)(b) provides an exemption from the sales and use tax for:
-
- [b]roadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, cable television systems, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by cable television systems.
- [b]roadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, cable television systems, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by cable television systems.
-
- - those that are scrambled, and
- programming for which a cable subscriber would pay a fee, whether or not the signal is
scrambled. -
- - those that are scrambled, and
While you point out that the Taxpayer's qualification for the industrial manufacturing exemption is supported by the Ruling of the Commissioner dated October 25, 1984, please note that in this case the taxpayer qualified for the manufacturing exemption because it was mass producing prerecorded phonograph records and audio tapes. This activity is clearly industrial in nature (see Standard Industrial Classification (SIC) Code 3661) and readily distinguishable from the Taxpayer's operation (see SIC Code 7389). In addition, please note that the classification of equipment for local tax purposes has no bearing on the applicability of the retail sales and use tax to such.
Thus, the Taxpayer may be allowed to prorate the tax on any purchases of equipment based upon the extent to which it is used in exempt broadcasting activities provided information is received indicating that the Taxpayer is under the regulation and supervision of the FCC.
Untaxed sales: The Taxpayer maintains that some transactions included in the audit should be exempt and that most of the transactions on which the tax was not collected would have been attributable to delivery of tapes produced by the Taxpayer's recording studios. It further maintains that during the audit period there was "considerable legal uncertainty" regarding the taxation of such transactions and cites various rulings by the Tax Commissioner.
In the audit, the auditor did not assess any untaxed sales for the period July 1986 - April 1988 because of changes in the sales tax laws with respect to advertising. However, prior to 1986 Virginia law exempted only advertising prepared and placed in the media by an advertising agency and charges for running advertisements in the media yet taxed all other sales of advertising where a tangible product was produced, including advertisements furnished to customers for subsequent placement in the media. Thus, the tax was appropriately assessed on tapes produced by the Taxpayer's video recording studios.
Please note, however, that consistent with the department's position in the rulings cited by the Taxpayer, if the Taxpayer can provide documentation indicating that sales tax was paid by the Taxpayer on blank tapes purchased for use in its recording studio and later transferred to its customers, I will agree to abate the assessment on such.
Unremitted sales tax: The Taxpayer maintains that the assessment relating to this issue resulted from the tax being collected but not remitted by a dishonest employee, its Director of Finance, who is no longer with the company. Because of this employee's reputation, the Taxpayer questions some of the accruals in its records and requests additional time to review such before responding to the assessment. In addition, the Taxpayer requests abatement of the penalty as it was attributable to defalcations of a dishonest employee and the Taxpayer was unaware of such activities.
Based upon the Taxpayer's situation, I am willing to consider abating the penalty and revising the tax based on information the Taxpayer can provide refuting such tax. This information was previously requested by our auditor but was not furnished.
Sales/leaseback transactions: The Taxpayer maintains that the tax on certain tangible personal property was included in the audit twice - when the property was purchased and then again when it was leased from the vendor. It, thus, argues that in the event that the equipment does not qualify for sales tax exemption, it should not be subject to double taxation.
While Virginia law allows a taxpayer who intends to resell equipment recently purchased to provide a vendor with a resale exemption certificate, once the equipment is used by the taxpayer, the resale exemption is negated. I have enclosed a copy of a Ruling of the Tax Commissioner dated May 12, 1987 which addresses this situation.
Thus, in the instant case, if the Taxpayer used the equipment prior to engaging in the sales/leaseback transaction, it would not be entitled to a refund of the tax paid at the time of purchase of the equipment. Based upon the information provided I am unable to revise the assessment with respect to equipment purchased and subsequently sold and leased back. However, if the Taxpayer can identify the specific purchases or verify that taxes were paid on the original purchases of the equipment included in the assessment, I may be willing to revise the assessment. This information was also previously requested by our auditor but was not furnished.
Accordingly, I will revise the assessment as indicated above and will consider further revisions if the Taxpayer can provide the documentation requested herein. Such information should be sent within 45 days of the date of this letter to the department's Office Services Division, Technical Services Section, P. O. Box 6-L, Richmond, Virginia 23282. If the documentation is not received within the specified time period, the Taxpayer will be sent a revised assessment with accrued interest which shall be immediately due and payable in full.
Sincerely.
W. H. Forst
Tax Commissioner
TPD/5446H
Rulings of the Tax Commissioner