Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments; Internal audit review
Topic
Collection of Delinquent Tax
Date Issued
09-29-1997
September 29, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****
This is in response to your letter in which you seek correction of sales and use tax assessments issued to ***** (the “Taxpayer") for the periods March 1994 through December 1994 and January 1995 through October 1996.
FACTS
The Taxpayer delivers satellite television programming to subscribers within and without Virginia. In addition to the television programming, the Taxpayer provides certain equipment to each subscriber. This equipment includes a satellite dish, signal converter and decoder, remote control unit, and cable wire, connectors, and other miscellaneous equipment and supplies.
The major portion of the assessment reflects untaxed purchases of the equipment which is subsequently provided to subscribers. The Taxpayer maintains that the equipment is exempt from the tax under the "broadcasting exemption" set out in Code of Virginia § 58.1-609.6(2). Alternatively, the Taxpayer maintains that the contested equipment may be purchased exempt of the tax for resale. The Taxpayer also protests the assessment associated with expensed purchases. These items were audited via a two-month sample, and you indicate that the sample period was not representative of the entire audit period.
Each of these issues will be addressed separately below.
DETERMINATION
EQUIPMENT PURCHASES
The broadcasting exemption: For purposes of the audit period, Code of Virginia § 58.1-609.6(2) provided an exemption from the retail sales and use tax for:
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- Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, cable television systems..., or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification transmission and distribution equipment used or to be used by cable television systems....
As you are aware, the department previously determined in Public Document 96-323 (11/8/96) that the exemption for "cable television systems" is applicable to "coaxial" cable systems, but not to other technologies such as satellite systems. Further, the application of the exemption to satellite television systems has been addressed in the 1991 Virginia Sales and Use Tax Expenditure Study. This document, prepared for the Virginia Senate and House Finance Committees, sets out the department's longstanding position that satellite communications providers do not enjoy the exemption.
The 1997 General Assembly amended the exemption set out in Code of Virginia § 58.1-609.6(2), effective July 1,1997. In pertinent part, the exemption was expanded to include "wired or land based wireless cable television systems." I have enclosed a copy of the amended statute. I do not agree that the amended reference to "wireless cable" in any way encompasses a satellite television system. First, l understand that "wireless cable" refers to a specific technology in which television programming is delivered via a microwave beam. Second, the statutory reference to "land based" would specifically exclude the Taxpayer's satellite delivery system.
I acknowledge your claim that there are coaxial cable elements to every satellite delivery system. I understand, for example, that the Taxpayer (and other satellite television providers) may use coaxial cable from the subscriber's satellite receiving dish to the converter/decoder box, and then from the box to the television set. Nevertheless, the distinction between cable systems and satellite systems is genuine regardless that both utilize some common technologies.
The resale exemption: You maintain that the Taxpayer may purchase the contested equipment exempt for resale. In this regard, you indicate that: (1) the charge for the equipment is separately stated on the customer's invoice, (2) that this charge normally represents 30-60% of the total price of the basic service, and (3) the Taxpayer adds, collects, and remits the Virginia sales tax on the separately stated charges made to customers for the equipment.
Transactions which involve both the sale of tangible personal property and the provision of services are generally either taxable or exempt on the full amount charged. The key issue in this case is determining whether the contested transaction, in which the customer receives both television equipment and television programming, is essentially the taxable sale of tangible personal property or the provision of a nontaxable service. In this regard, the department relies on the "true object test" set out in Title 23 Virginia Administrative Code (VAC), Section 10-210-4040. This document indicates that:
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- In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
Prior determinations issued by the Tax Commissioner indicate that the provision of television programming is a nontaxable service. Further, Public Documents 97-47 (2/7/97) and 87-208 (9/15/87) address the rentals of equipment to subscribers by providers of television programming. The Tax Commissioner determined that the true object of the customers was to obtain the television programming services rather than the tangible property accompanying the service.
Accordingly, the Taxpayer in the instant case is deemed to be a service provider when it leases, rents, or sells equipment in connection with satellite television programming. As such, the Taxpayer is not required to charge or collect the tax on such sales. Conversely, if equipment is sold, leased, or rented without the provision of television services, such sales are taxable. As the provider of a nontaxable service, the Taxpayer is subject to the tax on tangible personal property used or consumed in providing its service. This would apply to the satellite dishes, converter boxes, and remote control units provided to Virginia customers, and to any other tangible personal property (including installation supplies) used or consumed in Virginia by the Taxpayer.
You also indicate that the Taxpayer owns and provides the equipment, but that television programming, advertising, and related services are provided by participant partners in the markets. Code of Virginia § 58.1-602 indicates that a "retail sale" means "a sale to any person for any purpose other than for resale...." In this case, the Taxpayer's purchases are for its own use, and I have seen no evidence that the Taxpayer re-sells the contested equipment to its programming partners.
Taxes Erroneously Collected: Based on the above, it is apparent that the Taxpayer has erroneously collected tax from its customers on the rental of equipment used by the Taxpayer to provide television services. Pursuant to VAC 10-210-340(C), such erroneously collected taxes must be remitted to the department unless the Taxpayer can show that the tax was refunded or credited to the customers. Further, the Taxpayer may request from the department a refund of the taxes erroneously collected. The Taxpayer will need to show, however, that the tax was refunded to customers.
EXPENSED PURCHASES
In addition to the assessment related to fixed asset purchases, the Taxpayer also contests the assessment associated with expensed purchases. This portion of the assessment was calculated based on a sample period of two months. The resulting error ratio was then applied to the entire audit period.
You claim that the nontaxed items found in the sample period are not representative of the entire audit period. In this regard, you point out that most of the untaxed expenses were for purchases of posters and promotional materials which were not purchased uniformly throughout the audit period. The Taxpayer therefore requests that it provide its own analysis of expensed purchases.
The department will allow the Taxpayer in this case to submit its own detailed internal audit of expensed purchases for the entire audit period, but reserves the right to verify the results. Keep in mind, however, that the assessment of expensed items in this audit was relatively small, and constitutes less than 1 percent of the audit assessment.
SUMMARY
Based on this determination, the assessments are found to be substantially correct. Accordingly, revised bills, with interest accrued to date, will be issued to the Taxpayer. No additional interest will accrue provided the assessments are paid within 30 days. The department, however, will certainly review any additional information the Taxpayer submits on the expensed purchases issue. Based on that information, minor adjustments to the assessments may be warranted.
Please contact***** in the department's Office of Tax Policy at ****** if you have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12524I
Rulings of the Tax Commissioner