Tax Type
Retail Sales and Use Tax
Description
Paging system; Maintenance contracts
Topic
Taxability of Persons and Transactions
Date Issued
04-27-1992
April 27, 1992
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to our letter of October 30, 1991, in which you seek correction of a recent sales and use tax assessment to your company, **************(the "Taxpayer).
FACTS
The Taxpayer is engaged in the business of providing telephone answering service to customers. Customers may sign up for paging services in order to receive their messages as soon as they are received by the Taxpayer. Pagers are either sold or leased to customers. In addition, the Taxpayer has a subsidiary which is a licensed radio common carrier with the State Corporation Commission.
The Taxpayer contests three areas of the audit: the application of the tax to pagers used in the paging services, the taxability of a specific warranty agreement, and the denial of the broadcasting exemption to the Taxpayer. In addition, it seeks a revision of the assessment with respect to beeper batteries and message printer paper.
DETERMINATION
I will address each of the contested areas individually below:
Tax on papers: Virginia Regulation (VR) 630-10-102.2 provides that while charges for providing paging services are deemed to be charges for a services and thus are nontaxable, persons providing such services are the consumers of the paging devices and all other property used in providing the paging service and must pay the tax on the purchase of such property. While the Taxpayer concedes that he was wrong in not paying the tax on purchases of paging devices, he requests that the penalty assessed with respect to such purchases be abated since this was a new business for him. He points out that the Taxpayer began the business of leasing and selling pagers two years after the previous sales tax audit.
Since this was a new area for the Taxpayer I will agree to waive the penalty assessed with respect to purchases of paging devices.
Warranty agreement - The application of the sales and use tax to maintenance contracts is set forth in Virginia Regulation (VR) 630-10-62.1, a copy of which is enclosed. Under the regulation, contracts calling only for the provision of repair service by the seller of the contract are not subject to the tax; however, those contracts that provide in whole or in part for the provision of repair parts or replacements for the covered property are subject to the tax based upon their full selling price.
In the instant case, the maintenance agreement provides for the replacement of defective parts if returned to the dealer within 10 working days following receipt by the Taxpayer of the replacement materials. Thus, since the Taxpayer is entitled to receive tangible personal property (replacement parts) as part of the agreement, the total cost for the maintenance agreement is subject to the tax.
Broadcasting exemption: Va. Code § 58.1-608(a) (6) (b) provides an exemption from the 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.
With the exception of cable television systems, the exemption generally is not available to businesses engaged in the distribution of signals to a limited audience of subscribers, for example, businesses transmitting background music and those providing certain satellite communications services to subscribing customer.
In Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 619 (1973), the Virginia Supreme Court, in interpreting the above Code section, defined "broadcasting" as "to make widely known: to disseminate or distribute widely or at random . . . to send out from a transmitting station (a radio or television program) for an unlimited number of receivers." The Court further defined "broadcast" as "made public by means of radio or television."
In addition, the Court in WTAR Radio-TV Corporation v. Commonwealth of Virginia, et al., 217 Va. 877, 234 S.E.2d 245 (1977) defined "broadcast" as "the act of sending out sound or images by radio or television transmission . . . for general reception." Additionally, the Federal Communications Act defines "broadcasting" as "the dissemination of radio communication intended to be received by the public, directly or by the intermediary of relay stations." 47 U.S.C.A. § 153(o) (1970)
In the present case, the Taxpayer itself is not a concern regulated by the Federal Communications Commission and is not engaged in transmitting its own signals. Thus, it is not eligible for the broadcasting exemption. Its signals, instead, are transmitted by its subsidiary which owns the transmitting equipment and is a public service corporation meeting the telecommunications company definition in Va. Code § 58.1-400.
With regard to the Taxpayer's subsidiary's qualification for the broadcasting exemption, please note that while all paging receivers pick up the signal transmitted by the subsidiary, since each paging receiver in the system has its own unique code, only the person called receives an alert. Thus, the subsidiary is not disseminating signals directly to the general public but only to those customers who have contracted to receive paging services. As such, the broadcasting exemption does not apply and the subsidiary is liable for the sales and use tax on its transmission, etc. equipment, prior to January 1, 1989. On and after that date, the subsidiary qualifies for exemption under Va. Code § 58.1-608(a) (3) (c) - the public service company exemption - and may purchase or lease tangible personal property for use or consumption directly in the rendition of its public service exempt from the tax.
Accordingly, purchases of broadcasting equipment by the Taxpayer were correctly held taxable in the audit.
Adjustment for pager batteries and message printer paper: The Taxpayer maintains that a portion of the batteries and message printer paper purchased tax exempt by the Taxpayer and included in the audit assessment were resold to customers and that the sales tax was collected on such. Accordingly, you seek adjustment of the assessment. Please note that the assessment was adjusted by the auditor on May 22, 1991 to remove those items upon which the tax had been collected.
Accordingly, the assessment will be revised as explained above and a revised notice of assessment will be sent to the Taxpayer as soon as practicable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner