Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Video post-production facility
Topic
Taxability of Persons and Transactions
Date Issued
04-12-1993
April 12, 1993
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**************
This will reply to your letter of December 1, 1992 on behalf of *************** (the Taxpayer) whereby you seek correction of a sales and use tax assessment.
FACTS
The Taxpayer, a video post-production facility, was audited for the period March 1989 through February 1992. An assessment was produced primarily for the Taxpayer's failure to pay the tax on the purchase and lease of certain fixed assets and other purchases.
In providing its services, the Taxpayer hires professional staff and makes available editing suites and equipment. Clients contract with the Taxpayer to provide video editing, audio editing and mixing, color correction, video graphics and other sophisticated activities necessary to edit raw footage into a broadcast quality video master.
The Taxpayer charges on an hourly or a per-job basis, and such charges include rental of the suites, equipment and engineering time. The tax is charged and collected by the Taxpayer for the products it provides to customers.
You maintain that the Taxpayer should not be assessed tax on lease payments made and on the purchase price of equipment used in conducting its business since its facilities and equipment are rented to customers. Because the Taxpayer charges the tax on products sold to clients, you contend that assessing the tax on the purchase or lease of that equipment represents double taxation. Alternatively, you argue that the Taxpayer is engaged in providing a nontaxable service and further suggest that the Taxpayer be deemed an industrial manufacturer.
DETERMINATION
Pursuant to Va. Code §58.1-604, the tax is imposed upon the use or consumption of tangible personal property in Virginia. "Use," as defined in Va. Code §58.1-602 "means the exercise of any right or power incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Further, Va. Code §58.1-608(A)(10)(c) exempts from the tax "tangible personal property for future use by a person for taxable lease or rental as part of an established business...."
The enclosed ruling dated 5/25/77 addresses a transaction which involves the rental of space which includes the use of equipment. As in that situation, it is the Taxpayer who remains in direct and continuous control of the facilities and who has legal possession of all its property therein. Indeed, that control and possession are reinforced in the instant case since the professional staff using the contested equipment is hired by the Taxpayer.
In the instant case the Taxpayer charges the tax to its customers on the sale of tangible personal property (video masters) and not on the lease or rental of video equipment. Obviously, the cost of equipment is included in the price the Taxpayer charges, but that equipment is not in itself leased or rented to customers; nor does that equipment become a component part of the Taxpayer's finished product.
Therefore, I cannot agree that the Taxpayer operates as a lessor of tangible personal property as envisioned in the Code. Rather, the Taxpayer makes a taxable use of equipment in providing products and services to its customers. Thus, the Taxpayer must pay the tax on the cost price of such equipment in the same manner as a photographer must pay the tax on photographic equipment as mandated in Virginia Regulation (VR) 630-10-82.
Furthermore, I have addressed the application of the manufacturing exemption to the video industry most recently in the enclosed Public Document 93-40 (3/4/93). In that ruling, as well as in prior determinations directed to the industry, the department has consistently held that video production is not industrial in nature.
Nor can I agree that the Taxpayer's activities are analogous to those described in Public Document 87-61. That case deals with a studio that not only prepared a master tape, but also mass produced records and audio tapes for sale. That activity, classified as manufacturing in the SIC Manual, contrasts with the instant case in which only a master tape and a limited number of copies are prepared.
Regarding your contention that the Taxpayer provides its customers nontaxable services, I have enclosed prior determinations dated 3/30/87, 7/31/86 and 10/25/84. Each of these rulings specifically discuss the application of the tax as it relates to the Taxpayer's activities 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).
Accordingly, I find no basis for correction of the assessment, and that assessment is now due and payable. A payment copy of the assessment showing the outstanding balance, with interest accrued to date, will be mailed shortly. Further, because the determination reached in this case reflects long-standing policy that has been consistently applied, I feel that a conference with my staff would be nonproductive.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6578I
Rulings of the Tax Commissioner