Tax Type
Retail Sales and Use Tax
Description
Advertising; Media advertising
Topic
Taxability of Persons and Transactions
Date Issued
10-19-1994
October 19, 1994
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**********
This will respond to your letter seeking correction of a sales and use tax assessment to your business********************(the Taxpayer), for the period January 1990 through December 1992.
FACTS
The Taxpayer provides advertising and related services and products. It was audited and held liable for the tax on various purchases and sales. The Taxpayer contests the assessment relating to its sales and it maintains that it is providing exempt professional services. Furthermore, it contests the assessment of interest and penalty on the sales portion of the assessment.
DETERMINATION
Va. Code §58.1-609.6(5) exempts from the sales and use tax "[a]dvertising as defined in §58.1-602." Va. Code §58.1-602 defines the term "advertising" 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." Consistent with the statutory language, the department traditionally held that the exemption does not extend to all advertising but is limited to media advertising. The department's policy has been that modes of communication which disseminate information to the general public qualify as "media" for purposes of the exemption. See P.D. 88-90 (5/10188) and its attachments which explain the department's policy.
With respect to your comment likening your business to those of professional service providers whose services are exempt from the tax under Va. Code §58.1-609.5(1), you should note that in enacting the advertising exemption, the General Assembly recognized the inherent differences between advertising agencies and other providers of professional services, such as accountants and lawyers, when it created a separate exemption for advertising, rather than incorporating the exemption into the existing exemption for providers of professional services in Va. Code §58.1-609.5(1). Furthermore, in creating the exemption the General Assembly was responding in large part to the Virginia Supreme Court decision in WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E. 2d 245 (1977). In WTAR. the Supreme Court supported the taxation of advertising services whenever a tangible end product was produced. For the legislative history of the exemption, see the Legislative Impact Statement for the bill which created the exemption, House Bill 1472 of 1985, copy enclosed.
You also point out that a majority of the transactions with customers are mixed transactions as they involve both the provision of tangible personal property and the rendition of services. Accordingly, you assert that since in virtually every case, the "true object" of the transaction is the service rendered and the tangible personal property transferred is inconsequential, virtually all transactions are exempt from the tax. However, regardless of the extent of the service element, only advertising in the media qualifies for the advertising exemption.
From a review of the information provided, the auditor appropriately held taxable the sales in question. Although the Taxpayer is an advertising agency, not all of what it creates is necessarily intended for use in exempt media advertising. For example, the framing of photographs, the sale of forms, the sale of a videotape of a congressional hearing, the creation of plaques and certificates, and the sale of photocopies are not promotional in nature nor are they intended for dissemination to the public generally. Instead, they are merely sales of tangible personal property and accordingly are subject to the tax. Other transactions may have been promotional in nature but were not intended for dissemination to the public generally and thus did not constitute media advertising. These included the development of letters, announcements, and invitations relating to the retirement of a key corporate officer of
a client corporation, and the application or removal of corporate logos outside the development of an advertising campaign. Accordingly, the department finds no basis to revise the tax assessed.
With respect to the penalty, due to some confusion within the industry over the appropriate tax treatment of advertising, the department will agree to waive the penalty assessed. However, in the future, the Taxpayer will be expected to maintain a high level of compliance with the tax laws. With respect to your request for waiver of interest, as VR 630-10-80 explains, the "application of interest to all audit deficiencies is mandatory." Accordingly, the department cannot waive the audit interest.
A revised Notice of Assessment, with accrued interest, will be mailed to the Taxpayer shortly. As you are aware, the department currently is in the process of revising the advertising regulation. It is my understanding that you are on our list of interested parties for receipt of the regulation during the various review and comment periods. We welcome any comments you may have on the regulation.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7373H
Rulings of the Tax Commissioner