Tax Type
Retail Sales and Use Tax
Description
Advertising; In-house marketing promotions
Topic
Taxability of Persons and Transactions
Date Issued
06-12-1997
June 12, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in response to your letter seeking correction of the retail sales and use tax assessments issued to ********* (the Taxpayer).
FACTS
The Taxpayer owns and operates restaurants in Virginia. The department conducted an audit of periods ranging from January 1992 through November 1995. As a result of this audit, the Taxpayer was assessed use tax on untaxed purchases of tangible personal property used or consumed in its operations and on untaxed equipment maintenance warranties. The Taxpayer takes exception to the tax assessed on certain purchases and charges included in the audit.
DETERMINATION
Labor only warranty contracts
The Taxpayer takes exception to the tax assessed on certain warranties and maintains that the warranties at issue are exempt "labor only" contracts. Based on the documentation submitted, the audit will be revised to remove all "labor only" maintenance contracts included in the audit. However, untaxed "parts only" and "parts and labor" contracts are taxable based on Title 23 of the Virginia Administrative Code (VAC) 10-210-910 and will therefore remain in the audit.
Monthly allocation of advertising expenses
The Taxpayer has its own advertising department and maintains that the charges which it makes to its restaurants for the monthly allocation of advertising expenses are not subject to taxation. The Taxpayer allocates as many corporate expenses to its restaurants as possible, including salaries, promotional expenses and actual advertising. It is my understanding, however, that the advertising expenses at issue relate to the Taxpayer's account entitled "advertising contribution." Based on the Taxpayer's chart of accounts, this account covers expenses incurred by the Taxpayer for menus, posters, table tents, crayons, kids placemats, menu covers, table tent holders, gift certificates and other items for system-wide marketing promotions or programs. The Taxpayer allocates these expenses among its restaurants by charging a lump-sum fee based on 1.46% of the sales made by each restaurant. The Taxpayer maintains that these expenses qualify for the media advertising exemption.
Title 23 VAC 10-210-41 (A) explains the application of the tax to media advertising charges made by an advertising agency and provides, in part, the following:
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- The tax does not apply to charges by an advertising business for professional services in the planning, creating or placing of advertising in newspapers, magazines, billboards, direct mail. radio. television, or other media....
Title 23 VAC 10-21041 (B) further provides that the tax does not apply "to charges by an advertising business for the provision of concept, writing, graphic design, mechanical art, photography and production supervision in the development of an advertising campaign...."
The department has also interpreted the advertising exemption to be limited to modes of communication intended to convey promotional information to the public generally via radio, television, newspapers, billboards, direct mail and other similar forms of mass communication. Accordingly, in order for the Taxpayer's purchases to qualify for the advertising exemption, the object of the transaction must be for one of the media advertising services set out above. In this case, no evidence has been presented that any of the expenses at issue represented purchases of media advertising services. Rather, since the Taxpayer has its own advertising department, I must conclude in the absence of evidence to the contrary that the Taxpayer used its own talents to plan, create, conceptualize or design menus, posters, etc. When a business has its own advertising department, 23 VAC 10-210-43 specifically sets out the application of the tax as follows:
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- Materials and supplies and other tangible personal property used in "in-house" advertising, that is, advertising produced by any entity to advertise, promote or display its own products or services, are subject to the tax at the time of purchase.
Advertising produced by Taxpayer. When an in-house staff creates media advertising specifically for their employer, it does not constitute an “advertising business." As such, the provisions of 23 VAC 10-210-41 (A) and (B) do not apply. Accordingly, the Taxpayer is subject to the tax on its purchases of tangible personal property used in "in-house" advertising regardless of whether for use in a media advertising campaign. For example, if the Taxpayer creates a sample menu for a direct mail campaign and has a printer produce the menus, the charge by the printer represents a charge for printing, not advertising services. In such instances, menus shipped to the Taxpayer's Virginia locations are subject to the Virginia sales or use tax. If the Taxpayer creates the menus for use in its restaurants, charges by the printer to produce such menus are also taxable.
Advertising produced by advertising agency. If the Taxpayer hires an advertising agency to create, design and furnish menus, the application of the tax to the charge by the ad agency will depend upon whether the menus will be used by the Taxpayer for an exempt media advertising purpose or for a taxable non-media advertising purpose. For example, the tax applies to an ad agency's charges when menus containing promotional information are used only in the Taxpayer's restaurants as this use is considered a non-media advertising purpose. When an ad agency creates, designs and produces menus for a mass distribution by direct mail to potential customers of the Taxpayer, the object of the transaction is for media advertising services, and the charge is not subject to taxation.
Evidence lacking to establish media advertising. Due to the lack of evidence in support of the Taxpayer's claim, it is not possible to conclude that the expenses at issue represented charges by an advertising business for exempt media advertising services. For example, although gift certificates could be used in a media advertising campaign, the Taxpayer has not presented any evidence that the advertising exemption applies. Also, no evidence has been presented that the advertising exemption applies to kids placemats. Rather, in the absence of evidence to the contrary, it appears that kids placemats would be used only for non-media promotions, such as within a restaurant, and therefore would not qualify for the advertising exemption even though they may contain promotional information and may be purchased from an advertising firm which created and produced them. If these placemats are disposable, it is possible, however, that they would be considered part of the price of the meal, but there is no evidence to support such use. Furthermore, it appears likely that many of the other expenses assigned to account ***** are for non-media promotional purposes and are therefore subject to taxation. For example, menus, menu covers, crayons, table tents and table tent holders are items normally used and consumed by the Taxpayer in connection with serving its customers within the confines of its restaurants.
Accordingly, based on the information presented, l find no basis to prorate the tax or otherwise exempt the various expenses assigned to account********* . As such, there is no basis to entirely or partially exempt the 1.46% fee which the Taxpayer charges its Virginia restaurants.
Shirts, hats and other articles of clothing
The Taxpayer takes exception to the use tax assessed on purchases of shirts and hats imprinted with the Taxpayer's logo. The Taxpayer maintains that these items were resold to employees and customers and that it has collected the sales tax on the sales of such items. It is my understanding, however, that the Taxpayer has not provided any documentation to establish that it resold shirts, hats and other articles of clothing to employees and customers. In the absence of evidence that the Taxpayer actually resold all of the clothing items at issue, collected the sales tax on such sales, and remitted the sales tax to the department, there is no basis to remove these items from the audit.
Notwithstanding the foregoing, l will allow a revision to the audit if the Taxpayer can provide complete documentation in support of its claims to the department's auditor.
Over collection of tax by vendor
The Taxpayer takes exception to the tax assessed on purchases from a particular vendor who charged a higher rate of tax (i.e., 6% rather than 4.5%) because its invoicing system only accommodates one sales tax rate. The Taxpayer often corrected the sales tax charged by this vendor to the 4.5% rate but inadvertently paid the 6% sales tax rate on several purchases made from this vendor. In either event, this vendor has certified that it remitted all of the sales tax collected from the Taxpayer on such sales to the Department of Taxation. Accordingly, the Taxpayer maintains that it should not be assessed tax on the purchases from this vendor.
Title 23 VAC 10-210-340(D) addresses the over collection of the tax by dealers and sets out, in part, the following:
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- Any dealer who collects tax in excess of a...(4.5%)... rate or who otherwise overcollects the tax...must remit any amount overcollected to the state on a timely basis. Failure to do so will result in a penalty of 25% of the amount of the over collection. (Insert added as an update.)
Although the vendor has overcollected the tax, it has presented a written statement certifying that it has remitted to the Department of Taxation all of the sales tax collected on the sales made to the Taxpayer. For this reason, l find basis for concluding that the sales tax charged, albeit at the wrong tax rate, was for collection of the Virginia retail sales tax. Accordingly, these purchases will be removed from the Taxpayer's audit.
Purchases prior to audit period
The Taxpayer maintains that tax was erroneously assessed on untaxed purchases of fixed assets made prior to the audit period (i.e., purchases made in 1991) which were included in this audit. It is my understanding that the Taxpayer's accounting system caused a delay in booking many of these assets. Consequently, many assets purchased from March 1991 through December 1991 were not booked until February, March, May, June and July 1992. No tax was paid in connection with these purchases.
When a use tax liability is incurred (e.g., a vendor does not charge the Virginia sales tax on a taxable sale), Code of Virginia §§ 58.1-615 and 58.1-616 and 23 VAC 10-210-480 require every dealer incurring a use tax liability to report and pay the use tax due on or before the twentieth day of the month following the month of purchase. If the use tax is not timely reported and paid, penalty and interest charges apply.
In this case, fixed assets purchased in 1991 should not have been included in the audit. Accordingly, those purchases will be removed from the department's audit. However, it is my understanding that the department's auditor did not review any of the periods subsequent to the audit to ensure that the tax was paid on all fixed asset purchases made during the period of audit but booked at some time subsequent to the audit period. For this reason and the fact that the Taxpayer delays booking assets, it will be necessary for the auditor to examine periods subsequent to the audit for the purpose indicated above. If tax deficiencies are found, the assessment will be revised accordingly.
Proof of payment of tax
The Taxpayer maintains that tax was erroneously assessed on fixed asset purchases for which it has already paid the tax at the time of purchase. Based on the documentation copies presented, it appears that the Taxpayer may have paid the Virginia retail sales or use tax on several purchases of fixed assets included in the department's audit. Accordingly, upon verification of the original records by the department's auditor that such payment of tax has occurred, these purchases will be removed from the audit.
Special list labor allowance
The Taxpayer takes exception to the tax assessed on separately stated "special list" charges billed by one vendor. The Taxpayer maintains that these charges are for exempt installation labor. It is our understanding, however, that the vendor does not install equipment sold to customers. For this reason, we cannot positively conclude that the "special list" charges represent exempt installation labor charges. However, it is possible that this vendor made these charges to recoup the cost of hiring someone else to install the equipment. It is also possible that this charge represents some other type of exempt charge. Absent clear proof from the vendor as to the true nature of these charges, l find no basis at this time for removing them from the audit.
I will consider removing these charges from the audit if the Taxpayer can obtain a statement from the vendor certifying that these "special list charges, which have been separately billed on the invoices at issue*********dated *****only represent separately stated charges for "installation labor." If the Taxpayer can obtain and present this vendor certification to the department, such charges will be removed from the audit.
Conclusion
Based on all of the foregoing, I am asking the department’s ********** Audit Unit to review the Taxpayer's audit and make all of the necessary changes with respect to these issues. As indicated in this determination, some additional documentation is required from the Taxpayer in order to justify the removal of certain purchases from the department's audit. The Taxpayer should provide the requested information to the department's auditor within the next 60 days. Also, the auditor will need to examine the Taxpayer's records to ensure that the tax was paid on fixed asset purchases made during the audit period but booked subsequent to the period of audit. Upon completion of this review, revised notices of assessment will be sent to the Taxpayer.
If you have any questions, please contact *************Audit Supervisor, at **************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12000R
Rulings of the Tax Commissioner