Tax Type
Retail Sales and Use Tax
Description
Publishing and broadcasting; Film production
Topic
Taxability of Persons and Transactions
Date Issued
10-26-1995
October 26, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************:
This will reply to your letter of May 2, 1995 in which you seek correction of a sales and use tax assessment to your company************* (the "Taxpayer"), for the period November 1989 through December 1992.
FACTS
The Taxpayer, a film production company, contests the tax and interest assessed during its most recent audit on the following items: (i) purchases of audio sweetening and editing services, (ii) scripts and musical scores, and (iii) the delivery of scripts and dubs to Virginia after the production of a film in another state. You suggest that the above issues should be treated as new issues and thus the penalties assessed with respect to such should also be waived.
DETERMINATION
I will address the issues individually below:
Audio Sweetening and Editing Services -- The Taxpayer contracts with an editor for editing services. You suggest that the transaction represents the purchase of exempt services, consistent with P.D. 89-114 (4/7/89), rather that the purchase of tangible personal property. Furthermore, you cite other public documents in which the department held that the true object of the transaction was the services provided and that the tangible personal property transferred was inconsequential.
While P.D. 89-114 (4/7/89) does state that "film processing, editing, sound mixing, acting, choreography, directing, dialogue, coaching, casting, etc., will generally not be subject to the tax," you should note that the statement appears under the subheading of "Services" and is prefaced by a statement explaining that the tax does not apply to purely service transactions which do not involve a sale or transfer of tangible personal property. In instances in which tangible personal property is transferred in connection with such services, as in this case, because an actual transfer takes place, the transaction is taxable.
The department consistently has held that the "true object" of a transaction involving various services in connection with the sale of audiovisual tapes is the actual tape itself, notwithstanding the substantial service element involved. (See Ruling of the Commissioner dated October 25, 1984, copy enclosed.) P.D. 87-110, copy also enclosed, explains that the application of the tax to various charges depends on whether the charges are in connection with the sale of tangible personal property. If they are, then the tax applies; however, if the charges represent the provision of a service independent from the sale of a product, the tax does not apply. Accordingly, charges for editing and audio sweetening in connection with the transfer of a tape were appropriately held taxable by the auditor.
Scripts and Musical Scores
You suggest that scripts and music scores used in the production of films are exempt from the tax. However, P.D. 90-163 (9/11/90), copy enclosed, specifically states that the tax applies to the sale or lease of an original play as it does to any other creative work in tangible form. For instance, Virginia Regulation (VR) 630-108.2 provides that the tax applies to the sale of original painting and sculptures without deduction for the labor charges necessary to produce such works. Accordingly, the tax was properly assessed with respect to such items.
Finally, you suggest that the action of the General Assembly in enacting legislation effective July 1, 1995 for various services in connection with the production of exempt audiovisual works supports excluding the charges for the above from the assessment. However, the General Assembly's action in creating the new exemption for film production reinforces the department's position that such services in connection with the sale of tangible personal property are taxable prior to the effective date of the new exemption. The General Assembly was cognizant of the tax treatment of such and created the exemption, effective July 1, 1995, to encourage the production of films in Virginia and to also encourage national programmers and producers to establish operations in Virginia.
For your information, I am enclosing a copy of P.D. 95-198 (7/31/95) which explains the department's policy with respect to audiovisual production both before and after the effective date of the new exemption.
Scripts and Dubs Brought into Virginia
The Taxpayer managed several productions from its office in another state where it received scripts, dubs, and similar items for use in the productions. Once the productions were completed, the scripts, etc., were sent to Virginia. It is my understanding that this typically occurred six months after acquisition of the scripts, etc. You suggest that the scripts are not subject to the tax as their value, upon incorporation into the actual film production, is negligible. Furthermore, you suggest that under Code of Virginia § 58.1-603 no tax is due as the value of the scripts is negligible since they already have been used in the production of a film. Code of Virginia § 58.1-603 provides that "property brought within the Commonwealth six months or more after acquisition shall be taxed on the basis of the current value of such property at the time of its first use within the Commonwealth,"
I agree with your conclusion and will waive the tax, interest, and penalties assessed with respect to scripts, music scores, etc. used in film production in another state and merely sent to Virginia for storage purposes. Furthermore, I will agree to waive the tax assessed with respect to faxed or duplicate copies of scripts sent to Virginia provided these scripts, music scores, etc. were not used in the production of films in Virginia. However, the department has no choice but to tax the charge by the Polish production company for the final production work of the film notwithstanding the fact that the Taxpayer may have written off as worthless the production costs since the film was not picked up by any of the networks. The charge held taxable is in connection with the ultimate delivery of the film to Virginia.
Finally, you suggest that the department waive the penalties assessed with respect to the above items as they were "new issues". While VR 630-10-80(2)(A)(6) provides for the waiver of penalties on new areas, it also provides that "items of like class or similar nature may be subject to penalty even though the specific item was not addressed in the previous audit." The items held taxable in this second generation audit of the Taxpayer were similar in nature to those held taxable in the first audit. Furthermore, the regulation specifically states that the "application of penalty to audit
deficiencies will not be waived on second and subsequent audits for other than exceptional mitigating circumstances." Thus, I find no basis for waiving the penalties assessed except as provided above.
The assessment will be revised as set forth herein and a revised Notice of Assessment with accrued interest will be mailed to the Taxpayer as soon as practicable. If you have any questions about this matter, please contact**********in my Office of Tax Policy at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/96790H
Rulings of the Tax Commissioner