Tax Type
Retail Sales and Use Tax
Description
Graphic Design Services
Topic
Taxability of Persons and Transactions
Date Issued
04-10-1996
April 10, 1996
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear************
This will reply to your letter of January 24, 1996 in which you seek correction of a sales and use tax assessment to******* (the "Taxpayer") for the period January 1992 through December 1994.
FACTS
The Taxpayer offers graphic design services and produces brochures, annual reports, corporate image packages, and communication tools for their clients. The department's audit determined that the majority of the Taxpayer's services were for media advertising. The Taxpayer contended in a previous audit that it was not producing media advertising and appealed the results of that audit. The Department determined that the Taxpayer was an advertiser and that the application of the advertising exemption was proper. Despite the previous determination the current audit discloses that the Taxpayer continues to charge its clients tax rather than remit the tax to its suppliers as previously instructed.
While the Taxpayer does not contest the audit on the basis of whether it is or is not an advertiser, the Taxpayer disagrees with the assessment stating that the sample calculations should be adjusted to account for the measure on which sales taxes were collected on sales to their clients. Additionally, the Taxpayer disagrees with the inclusion of three purchases in the sample stating that tax was paid in the filing of a prior return. The Taxpayer also disagrees with the inclusion of a specific printing purchase transaction in the sample, providing that the printed matter was a nontaxable purchase for resale.
Lastly, the Taxpayer requests a waiver of all penalties and interest stating it has exerted every effort to understand and comply with the sales and use tax laws, which is at best difficult for the average taxpayer.
DETERMINATION
Before I respond to the issues, I will explain the advertising exemption as it generally relates to the Taxpayer.
Generally
Code of Virginia § 58.1-609.6(5), copy enclosed, exempts from taxation, charges for "advertising" which is defined in Code of Virginia § 58.1-602, copy enclosed, as:
- [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. (emphasis added.)
The total charge for any of these items by an advertising business (defined in Virginia Regulation (VR) 630-10-3, copy enclosed, as any person or group of persons providing "advertising") is not subject to the tax, whether or not such charge includes charges for one or more items of tangible personal property conveyed to the client of the advertising business.
Code of Virginia § 58.1-602 further provides that "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." (See also section 2(B) of VR 630-10-3 for examples of taxable purchases by advertising businesses.)
I shall now respond to the issues as they were presented.
Sample Adjustment
Despite the Taxpayer's argument, I find no basis to adjust the sample calculation for the purchases representing the sales in which tax was collected from your customers. The previous audit revealed that the Taxpayer was primarily involved in the production of media advertising. As such, purchases associated with media advertising were subject to tax. The current audit again finds untaxed purchases in the sample, used in the development of media advertising transactions, and therefore, subject to the tax.
I note that the Taxpayer was properly instructed by the auditor to either make payment of the tax to the supplier on such purchases or to accrue and remit the tax on such purchases where tax had not been charged. I also note that the department's previous letter dated June 5,1992 specifically stated that "the department deems you to be an advertiser and as such, you are expected to implement the appropriate procedures for the collection and remittance of the tax." Accordingly, in light of the fact that such instructions were not followed, I find the sample to be correct in this instance.
You may apply for a refund of the collected taxes, from the department, upon proof that such taxes have been refunded to your clients. VR 630-10-89 addresses sales and use tax refunds, and states in part, the following:
- A dealer may request a refund for taxes erroneously assessed or illegally collected. The dealer must show that the tax erroneously or illegally collected was paid by him and not passed on to the consumer, or the tax was collected from the consumer as tax and subsequently refunded to the consumer. refunds cannot be authorized unless the request is made within three years from the due date of the return. (Emphasis added.)
Use Tax Paid
I have allowed for an adjustment of the sample for the three purchases on which tax was remitted to the department in a May 1994 sales and use tax return.
Purchase of Printing for Resale
The purchase of the printed material totaling was included in the purchase sample on the basis that it was included in the development of media advertising. The printed material in question (a director's report) which is similar to an annual report, was a report made available to the general public, by your customer. As previously stated in Code of Virginia § 58.1-602, the Taxpayer is subject to the tax on the purchase of printed material, for subsequent use in media advertising, as the Taxpayer is the user and consumer of tangible personal property in such media advertising. I have enclosed P.D.87-203, August 26,1987, in which the department has held such purchases to be taxable.
Please note that in relation to the purchases of printing included in this audit, the 1994 Session of the Virginia General Assembly changed the wording of Code of Virginia § 58.1-609.6(4). Summarily, the 1994 change, effective July 1, 1994, provided that, notwithstanding the definition of advertising as in Code of Virginia§ 58.1 -602, an out-of-state advertising business is exempt from the sales and use tax on all purchases of printing from Virginia printers. The expansion of this exemption, in this instance, however, does not change the taxable status of the foregoing printed material. As a result, there remains no basis to adjust the department's audit.
Additionally, it should be noted that the 1995 Session of the Virginia General Assembly further expanded the printing exemption under Code of Virginia § 58.1-609.6(4). Effective 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 of this subdivision...." The balance of the expanded exemption requires that the advertising business shall certify [by proper documentation] that the printed material was distributed outside the Commonwealth. Accordingly, effective as provided above, the director's report would be an exempt purchase of printed material for distribution outside the Commonwealth.
Penalties and Interest
On second and subsequent audits, penalty is mandatory for tax deficiencies unless an acceptable level of compliance is achieved or exceptional mitigating circumstances are shown to have caused the deficiency. Virginia Regulation (VR) 630-10-80, copy enclosed, provides that penalty may be waived on second audits if use tax compliance is 60% or greater. As the use tax compliance for this second audit is only 11%, and instructions from the previous audit were not adhered to, I do not find sufficient cause to allow for waiver of the penalty.
The department is bound by the provisions of Code of Virginia § 58.1-1812 which mandates the application of interest to any assessment of tax. While I have allowed an adjustment of the sample as previously stated, which has also slightly altered the interest, the balance of the interest remains properly due as reflected on the revised assessment.
I applaud your efforts to establish procedures to more closely determine the applicability of the tax to certain transactions. I suggest for the future, however, that if you have any questions relating to the proper application of tax to any transaction, you may contact the department's**** District Office for assistance.
The balance of the revised assessment, less the amount previously paid, totals Upon receipt of the revised assessment you will have 30 days to remit payment to the department. If the revised amount is not paid within that time, interest will accrue on that amount from the date of the original assessment.
If you have any additional questions regarding this matter, please contact**** of the department's Office of Tax Policy at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10901Q
Rulings of the Tax Commissioner