Tax Type
Retail Sales and Use Tax
Description
Printing; Print and CD-ROM catalogs
Topic
Taxability of Persons and Transactions
Date Issued
12-20-1996
December 20, 1996
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter in which you seek correction of sales and use tax assessed to *******(the Taxpayer) for the period October 1992 through September 1995. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a nationwide mail order catalog business and two retail stores within the Commonwealth. The Taxpayer primarily sells audio/video equipment and other electronic items. The Taxpayer was audited and assessed tax in several areas. The Taxpayer protests the tax assessed on purchases of mailing services, CD-ROM diskettes, static stickers, video production, and certain tools and supplies. Waiver of the audit penalty is also requested. I will address the issues individually.
DETERMINATION
Processing services
The auditor assessed the tax to mailing services in connection with the printing of catalogs. The tax assessed to the mailing services is based on a percentage of the catalogs delivered into Virginia. In this case, a master mailing list is sent via magnetic tape to an out-of-state vendor who will perform mailing services including merging/purging, scoring, etc. The magnetic tape is then sent directly to the vendor's printing division for the printing of the labels. The printing of the catalogs is also performed by the vendor's printing division. The Taxpayer asserts that the charges for mailing services are exempt services and not taxable. The Taxpayer believes that while the printing of the catalogs and the mailing services are performed by the same vendor, the transactions are separate and distinct as the vendor's printing and mailing operations are located in separate facilities.
Code of Virginia § 58.1-609.6(4) provides an exemption from the tax for "[C]atalogs, letters, brochures, reports, and similar printed materials, except administrative supplies, the envelopes, containers and labels used for packaging and mailing same,... when stored for twelve months or less in the Commonwealth and distributed for use without the Commonwealth". Virginia Regulation (VR) 630-10-97.1 addresses taxable services and states, in part, that the tax applies to charges made for any services included in or in connection with the sale of tangible personal property.
As explained in Public Document 86-9 (113186), when mailing services alone are provided, no tax is due from the customer. However, in instances in which mailing services are provided in connection with the sale of printed materials, the tax is due on the total charge for the printing and services provided. In this case, the fact that the vendor's mailing operation is separately located from the printing operation has no bearing on the application of the tax as the vendor handled the entire process, starting from the magnetic mailing list to the printing and distribution of the catalogs. Based on the above, the assessment is found to be correct.
CD- ROM Catalogs
An assessment was made on the total purchase price for the production of a master CD-ROM catalog and charges for the duplication of the CD-ROM master for use in marketing the Taxpayer's products. The Taxpayer protests the tax assessed and maintains that the CD-ROM catalogs should be treated the same as other printed catalogs and assessed based on the distribution within the Commonwealth.
The department previously ruled in P. D. 94-248 (8112194), copy enclosed, that publications provided on CD-ROM qualify as exempt publications under Code of Virginia §58.1-609.6(3) provided certain criteria are met. The department ruled that the exemption is applicable regardless of the medium of the publication - whether it is in the traditional print format or in microfilm or CD-ROM.
Based on the above ruling, catalogs provided on CD-ROM qualify for exemption under Code of Virginia §58.1-609.6(4) when stored for twelve months or less in the Commonwealth and distributed for use without the Commonwealth. As the Taxpayer was held liable on the total purchase of CD-ROM catalogs, the audit will be adjusted to remove the catalogs for distribution without the Commonwealth.
Static stickers
The auditor assessed the tax on the purchase of static stickers that are provided free of charge to customers who buy its products. The stickers are enclosed in the product shipment and are designed far placement in the customer's automobile window to display the Taxpayer's business. The Taxpayer maintains that the stickers are exempt promotional materials. In the alternative, the Taxpayer believes that only those stickers distributed within the Commonwealth should be subject to the tax.
VR 630-10-18.1 (2) addresses the exemption for catalogs and other printed materials and provides, in part, that the tax applies to catalogs and other printed materials unless the materials meet all three of the following conditions: (1) the materials will be stored in Virginia for less than 12 months; (2) the materials will be distributed for use outside Virginia; and (3) the materials will be used for advertising the sale of tangible personal
VR 630-10-86(8) provides an exemption for letters, brochures and similar printed materials but not administrative supplies. The regulation defines "administrative supplies" to include letterhead, envelopes and stationery, invoices, billing forms, price lists, computer cards, certificates, business cards, diplomas, and awards. Administrative supplies are subject to the tax when sold at retail except those administrative supplies that become an integral part of exempt printed materials.
In this case, the static stickers do not qualify for exemption as they only display the Taxpayer's business and do not advertise tangible personal property for sale. Rather, it appears that the static stickers meet the definition of taxable administrative supplies as they are similar to business cards that are used to display a taxpayer's business. I find that the tax is properly assessed in this case.
Further, the total purchase of the static stickers will remain taxable notwithstanding the fact that the stickers may be shipped to another state as first use of the property is deemed to be made in Virginia.
Video production
The Taxpayer contracted with a production company to produce a finished video product. The auditor assessed the tax to the total purchase price of the master home theater video and charges for the duplication of the video which the Taxpayer withdraws from inventory and distributes in two ways: (I) sells the video to potential customers, or (ii) provides the video with the sale of a home theater system. The home theater video is sold to potential customers and customers who have purchased the system to educate them about the home theater system.
The department has previously ruled that the total charge for the production of a video for use in media advertising is nontaxable. The term "media" has been defined in VR 630-10-3 to mean and include " newspapers, magazines, billboards, direct mail, radio, television, and other modes of communications." The exemption does not extend to producers of video tapes for non-media advertising. See the enclosed copies of P.D. 93-40 (03/04/93) and P.D. 93-87 (03129193). Based on the above, the master production of the home video in this case does not meet the definition of media advertising because the video is not used to disseminate information to the general public. Rather, the master video is used to produce copies for resale or provided to customers who buy a home theater system. Thus, the entire charge for the production of the master video is taxable.
In addressing the additional purchase of home theater videos held taxable in the audit, the Taxpayer maintains that all such videos are purchased for resale. Based on the information provided by the Taxpayer, the home theater video is provided free of charge in connection with the sale of a home theater system.
VR 630-10-32 discusses dealer's withdrawals from inventory and provides, in part, that "[a]n item withdrawn from inventory for a promotional give-a-way or other free distribution, is subject to the tax at the time of withdrawal." As a retailer, the Taxpayer is entitled to purchase the home theater videos exempt of the tax under the resale exemption if they will be sold to its customers at retail, upon which the tax is imposed. However, when the Taxpayer removes any exempt resale inventory item for a purpose other than an exempt retention, demonstration or display, the item becomes subject to the tax upon withdrawal. The tax is computed on the cost price. Based on the above, the auditor correctly assessed the tax on video tapes purchased under a resale exemption and provided free of charge to customers in connection with the sale of a home theater system. It is my understanding that the home theater videos held taxable in the audit include videos actually sold to potential customers. If the Taxpayer can provide a break out of those videos for resale, they will be removed from the audit.
In the future, the Taxpayer may purchase all home theater videos exempt of the tax since it does not know at the time of purchase whether the video will be resold or provided free of charge in connection with the sale of a home theater system. The videos withdrawn from the Taxpayer's inventory and provided free of charge to customers are subject to the tax at the time of withdrawal.
Tools and supplies
The Taxpayer produced a master die and mold to manufacture kits used in the installation of car stereos. The master die and mold were provided to a machine shop for the manufacture of a face plate which is a component part of the kit. The Taxpayer uses tools to assemble the kits that are sold in connection with the car stereo. The Taxpayer takes exception to the taxing of the die, mold, and tools and maintains that these items are used in manufacturing.
Code of Virginia §58.1-609.3(2) provides an exemption from the sales and use tax for machinery, tools, and other items used directly in the manufacture of tangible personal property for sale or resale in the industrial sense. This exemption was interpreted by the Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), which held that the cited statute was intended "to provide exemption for machinery and tools used in... manufacturing... products for sale or resale only in the industrial sense". Code of Virginia § 58.1-602 provides that the term "industrial in nature" shall include all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual".
A review of the 1987 edition of the SIC Manual shows that the Taxpayer's activities do not fall within codes 20 through 39, but rather are classified in code 5961 " Catalog and Mail-Order Houses" and in code 5999 " Miscellaneous Retail Stores". The Taxpayer's business is not industrial in nature; therefore, tools and supplies for use in fabricating the kits do not qualify for the manufacturing exemption.
Penalty
In order for penalty to be waived on third and subsequent audits, use tax compliance ratios must be a minimum of 85%. Based on the above, and the fact that the Taxpayer's use tax compliance ratio on this third generation audit is 63%, the department is unable to waive the penalty. Subsequent to any audit revisions, the use tax compliance ratio will be recomputed. Once a new compliance ratio has been established, the penalty will apply in accordance with the above tolerances.
Summary
The audit will be returned to the auditors for revision in accordance with this determination. The Taxpayer will receive an updated bill with interest accrued through the date of the Taxpayer's letter of protest. The bill should be paid within 30 days to avoid the accrual of additional interest.
If you have further questions, please contact*************in the Office of Tax Policy at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10858T
Rulings of the Tax Commissioner