Tax Type
Retail Sales and Use Tax
Description
Advertising; Promotional materials
Topic
Taxability of Persons and Transactions
Date Issued
06-20-1996
June 20, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********************************
This is in response to your letter of August 16, 1994, seeking correction of the sales and use tax assessment issued to******(the Taxpayer). I apologize for the length of time it has taken to respond to your letter.
FACTS
The Taxpayer provides consulting, management, marketing and administrative services and is also a licensed insurance agency authorized to offer and market insurance benefits. An audit for the period February 1988 through January 1994 resulted in an assessment for not remitting use tax on untaxed purchases of tangible personal property used or consumed in its services.
The Taxpayer maintains that the department has erroneously assessed tax on certain printed promotional materials. The Taxpayer entered into an agreement (Agreement #1) with another party (Other Party) to (i) furnish certain marketing and promotional services in connection with the Other Party's efforts to obtain new members via a direct mail marketing campaign and (ii) provide such members with certain insurance-related benefits of membership pursuant to a separate agreement with an insurance underwriter.
Specifically, the terms and conditions of Agreement #1 require the Taxpayer to prepare, develop and promote certain promotional and informational materials for inclusion in the Other Party's solicitations, to provide all editorial services and production supervision needed, to distribute in excess of one million solicitations during each twelve month period, to determine the size and type of media to be utilized, and to select the mailing lists and other media components to be used. All material prepared on behalf of the Other Party is identified as belonging to the Other Party and is marked with the Other Party's logo and address. The Taxpayer is solely responsible for the costs of the solicitations and is paid compensation of one dollar for each new member obtained by the Other Party as a result of the solicitation. The Taxpayer also serves as the exclusive insurance broker of record with respect to insurance premium commissions earned in connection with the solicitation and serves as an intermediary between the insurance underwriters and the Other Party. The Taxpayer provides certain administrative services on behalf of the Other Party, such as processing all responses to the solicitations.
The Taxpayer maintains that Agreement #1 represents predominantly a solicitation of insurance services by the Taxpayer, rather than the provision of media advertising services to the Other Party. As such, the Taxpayer maintains that its purchases of printed materials should qualify for the exemption set out in Code of Virginia § 58.1-609.6(4) as in effect for the period of audit, for printed materials, other than administrative supplies, stored for 12 months or less in Virginia and distributed for use in other states.
Although not mentioned in your letter, it is my understanding that the Taxpayer objects for the same reasons cited above to the tax assessed on printed promotional materials purchased in connection with another agreement (Agreement #2). As set out by the terms and conditions of Agreement #2, the Taxpayer has been engaged to assist the other party to such agreement in conducting one or more marketing tests and/or campaigns for the sale of products to prospective members of certain target groups. In addition to the marketing services provided, the Taxpayer is expected to perform certain administrative services and to comply with certain other miscellaneous covenants set out in such agreement.
DETERMINATION
Code of Virginia § 58.1-609.6(5) provides an exemption from the sales and use tax for "advertising," which is defined in Code of Virginia § 58.1-602 as:
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- [t]he 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. Any person providing advertising as defined herein shall be deemed to be the user or consumer of all tangible personal property Purchased for use in such advertising. (Emphasis added.)
In addition, 1 of Virginia Regulation 630-10-3, copy enclosed, on advertising defines an "advertising business" as "any Person or group of persons providing advertising...." (Emphasis added.) Regardless of the nature of one's business activities, if a business enters into a transaction to produce, plan or create advertising for placement in promotional materials to be distributed to the general public, it will be acting as an advertising business in such instances. For example, any photographer (although generally deemed a retailer) who provides photography services to customers for use in a specific media advertising campaign (i.e., the provision of media advertising services) is considered an advertising business in those transactions. See PD's 87-72 (2/27/87) and 88-90 (5/10/88), copies enclosed.
Agreement #1
Based on the terms and conditions of Agreement #1, it is apparent that the Taxpayer is providing media advertising services as it has contracted to plan, create and place advertising in the media. For instance, the agreement is called a "Marketing and Administrative Agreement" and generally states that the Taxpayer shall provide "certain marketing services and promotional services" to the Other Party.
Specifically, the Taxpayer plans or creates advertising as it has agreed to "prepare such promotional and informational materials as it shall deem appropriate for inclusion in...(the solicitation)...and...provide all editorial services and production supervision required in connection therewith." The agreement stipulates that "[a]ll material prepared on behalf of...(the Other Party)...shall be identified as belonging to...(the Other Party)...and shall be marked with the...(the Other Party's)...logo and address." The Taxpayer "shall determine the size and specify the media to be utilized in connection with any Solicitation...and shall select the mailing lists and other media components to be used in connection therewith." The Taxpayer "shall contract for and pay for all expenses of the Solicitations...(and)...shall be solely responsible for the costs of the Solicitations...." The Taxpayer is also placing advertising in the media as it is expected to "carry out direct mail Solicitations in excess of one million pieces in any twelve...month period...." (Inserts added.)
Accordingly, these tasks readily demonstrate that the Taxpayer is acting as an advertising business in the performance of its tasks under the agreement and is therefore deemed the user or consumer of all of the materials used in the provision of its advertising services. In addition, § 2(B) of VR 630-10-3 provides that:
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- [t]he tax applies to all purchases by an advertising business including, without limitation,...[p]rinting, including direct mail items, non-customized or stock mailing lists, handbills, brochures, flyers...and similar printed materials whether or not for use in the development of a specific advertising campaign, and whether or not any such materials are intended for distribution out of state." (Emphasis added.)
Based on this regulation which is established on the statutory definition of "advertising" cited above and is applicable to the Taxpayer during the period of audit (a 1995 law change is discussed later), the department considers all purchases of printed materials by a Virginia advertising business from a Virginia printer in conjunction with an advertising campaign to be subject to the tax regardless of whether the materials are shipped inside or outside of Virginia by the printer. This has been the consistent policy of the department since the enactment of the advertising regulation in 1986; see PD's 88-62 (4/6/88), 91-197 (8/30/91), 92-253 (12/28/92) and 93-180 (8/9/93), copies enclosed. Also, see Tax Bulletin 93-7 (4/23/93), copy enclosed, which specifically sets out that delivery is deemed to be made in Virginia when "[t]he printer, acting on behalf of the advertising agency, delivers printing to a mailing service....
Furthermore, Code of Virginia § 58.1-602 defines a "sale" to mean "any transfer of title or possession,...in any manner or by any means whatsoever, of tangible personal property...." As the Taxpayer directed the printer to ship the finished materials to an out-of-state mailing service, title to the property transferred to the Taxpayer in Virginia. Moreover, the Virginia Supreme Court has held that "[i]f a taxable event occurs in Virginia the subsequent delivery of property outside of this State does not immunize the taxable event." Commonwealth v. Miller-Morton, 220 Va. 852, 858 (1980). As such, the Taxpayer is the legal purchaser of the printed materials and subject to the tax as set forth above. See PD 92-36 (4/23/92), copy enclosed.
Agreement #2
Based on the terms and conditions of Agreement #2, it is apparent that the Taxpayer has contracted to provide media advertising services. Accordingly, the Taxpayer is liable for the tax on all of its purchases of promotional printing as set forth above.
Based on all of the facts presented, the above cited public documents which set out the well established policies of the department and the Code of Virginia, the assessment of tax on the printed promotional materials in this case is proper. The Taxpayer will receive an updated bill for the outstanding contested liabilities. The bill should be paid within 30 days to avoid the accrual of additional interest charges.
Please note that the 1995 General Assembly expanded the exemption set out in Code of Virginia § 58.1-609.6(4), copy enclosed, to further include that:
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- from July 1, 1995, through June 30, 1997, any advertising business which purchases printing from a printer within the Commonwealth shall not be deemed the user or consumer of the printed materials when such purchases would have been exempt under subdivision 3 or this subdivision, provided that the advertising agency shall certify to the Tax Commissioner, upon request, that such printed material was distributed outside the Commonwealth and such certification shall be retained as a part of the transaction record and shall be subject to further review by the Tax Commissioner. (Emphasis added.)
Accordingly, printed promotional materials (other than administrative supplies) purchased by the Taxpayer on or after July 1, 1995 may be purchased exempt of the tax, if stored for 12 months or less in Virginia and distributed for use outside of Virginia. See Tax Bulletin 95-5 (6/23/95), copy enclosed. To make the exempt purchases noted above, the Taxpayer must provide its printer with a completed certificate of exemption, Form ST-10A (Rev 6/95), copy enclosed, with box #1 marked. Unfortunately, this exemption is not retroactive to periods prior to July 1, 1995 and therefore cannot be used to exempt any such purchases made during the period of audit.
If you have additional questions about this matter, please contact ******* at ******** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9356R
Rulings of the Tax Commissioner