Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Waiver denied
Topic
Collection of Delinquent Tax
Date Issued
08-23-1995
August 23, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear********:
This will reply to your letter of November 10, 1994 in which you seek correction of the sales and use tax audit assessment of ********** (the "Taxpayer") for the period of February, 1991 through December, 1993.
FACTS
The Taxpayer is in the business of publishing and printing books and audio/video tapes. The Taxpayer is taking exception to the assessment of penalty in the noncontested portion of the audit. The Taxpayer is also taking exception to the tax, penalty and interest on the contested portion of the audit.
The contested portion of the audit involves basically two areas of dispute. First, the Taxpayer is taking exception to the taxing of labor/service charges in connection with the printing of brochures, catalogs, etc. The printing of brochures, catalogs, etc., were subcontracted out and the invoices contained separate line item charges for folding, trimming, converting, etc. The auditor only taxed those brochures and catalogs that were delivered to Virginia residents. The Taxpayer takes exception to the taxing of the folding, trimming, and converting charges associated with the catalogs and brochures delivered in Virginia.
The Taxpayer is also taking exception to the assessment of taxes on charges for the right to reproduce photos on the cover of video jackets and in brochures. The Taxpayer feels this is an intangible that does not qualify as tangible personal property for purposes of the retail sales and use tax. The Taxpayer bases this on Virginia Regulation (VR) 630-10-26 which provides an exemption for packaging materials, i.e. video jackets, and VR 630-10-86, the exemption for brochures stored in Virginia for less than 12 months and distributed outside Virginia.
DETERMINATION
I will first address the audit penalty associated with the noncontested portion of the audit. The Taxpayer contends that the responsibility for sales and use tax payments resides with their New York parent company, with minimal involvement by the local Virginia operation. VR 630-10-80 (copy enclosed) provides that penalty application to audit deficiencies is mandatory and is generally determined by the taxpayer's compliance with Virginia tax laws. This regulation goes on to provide that use tax compliance on second audits must meet or exceed 60%, and must meet or exceed 85% on all subsequent audits and that "penalty will not be waived on 2nd and subsequent audits for other than exceptional mitigating circumstances." According to department records, this is the third generation audit of the Taxpayer and use tax compliance on this audit was 0%. Although I appreciate the fact that accounting functions may be handled in other states, this is not a unique or extraordinary circumstance for a multistate business. For this reason, I regret that I can find no basis for waiving the audit penalty on the uncontested portion of the audit.
In regard to the catalogs and brochures VR 630-10-18.1 provides that the sales and use tax applies to these item unless they meet all three of the following criteria:
i) The materials will be stored in Virginia for less than 12 months
ii) The materials will be distributed for use outside Virginia; and
iii) The materials will be used for advertising the sale of tangible personal property.
Unless all three of the criteria set forth above are met, catalogs, brochures and other printed materials will be subject to the tax. Therefore, brochures and catalogs delivered to Virginia residents would be subject to the tax. A review of the invoices enclosed with your letter, reveal that the brochures and catalogs in question were taxed based on a percentage of 2.49% of the total invoice amount, less freight. The percentage represents those brochures and catalogs delivered into Virginia which do not meet the exempt criteria set forth above. As for the cutting and converting charges separately stated on the suppliers invoice, VR 630-10-97.1 addresses taxable services and states in part, "the tax does apply to charges made for... any services included in or in connection with the sale of tangible personal property". In this case, the catalogs and brochures delivered into Virginia represent the taxable sale of tangible personal property, therefore the cutting and converting qualifies as a service in connection with the sale of tangible personal property and is therefore taxable.
Finally, the Taxpayer also contests the taxing of photo rights paid for the right to reproduce photos on the cover of video jackets and brochures. Code of Virginia § 58.1-609.6.1 provides an exemption for the leasing, renting or licensing of copyright audio or video tapes, and films for public exhibition at motion picture theaters or by licensed radio and television stations. However, this is a specific exemption which applies strictly to the transaction referred to, i.e. tapes and films, and not to similar transactions, such as the photo rights in this case. The department considers photo rights to be the rental of tangible personal property and therefore taxable as provided in VR 630-10-57 (copy enclosed). While the department recognizes that the video jackets themselves are exempt as packaging materials under VR 630-10-53, I regret that the exemption does not extend to the photo rights purchased to be incorporated into the jackets.
While I sympathize with the Taxpayer's position, unfortunately based on the above I can find no basis for revising the audit. If you should have any further questions, please contact***********, Office of Tax Policy, at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8702K
Rulings of the Tax Commissioner