Tax Type
Retail Sales and Use Tax
Description
Video production; Government & Maintenance contracts; Leases & rentals
Topic
Collection of Delinquent Tax
Taxability of Persons and Transactions
Date Issued
03-31-1999
March 31, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period October 1994 through July 1997. I regret the delay in answering your appeal.
The Taxpayer provides engineering and environmental services, including the preparation of pollution reports and pollution prevention analysis to government and commercial customers. The two contested issues in this case concern: (1) an informational video which the Taxpayer provided to the federal government under an engineering services contract, and (2) maintenance charges associated with the lease of copy machines used by the Taxpayer.
Charges for Informational Video
FACTS: The Taxpayer entered into a broadly written contract with an agency of the federal government to provide general engineering support services. These engineering services include review designs, training support, and the preparation of technical and engineering manuals, handbooks, and videos. In the instant case, the Taxpayer contracted to provide the federal government an informational video related to environmental restoration.
The Taxpayer subcontracted with a Washington, D.C. video production company to provide production and post-production video services and to deliver multiple copies of the finished product to the Taxpayer's Virginia facility. Production services included direction, script writing, audio production and camera operation. Post production services included charges for editing, graphic arts, an edit suite, and composition. I understand that charges for these services were invoiced monthly. Each invoice identified the work performed and listed the labor categories and the hours incurred for each category. Upon completion, the Taxpayer shipped about 130 copies of the finished videotape to its government agency customer.
The Taxpayer maintains that the video was provided to the government as part of the engineering services contract and further contends that the charges made by the video production company are charges for nontaxable services.
DETERMINATION: The department has traditionally held that in considering the tax treatment of federal government contracts, it must be determined whether the contract is for the sale of tangible personal property or for the provision of services. The "true object' test described in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 is used to determine whether the contract is for the sale of tangible personal property or for the provision of some service.
If a contract is for the sale of tangible personal property, the contractor may purchase such property exempt from the tax for resale. Conversely, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its contractual services, even though title to some or all of the property may pass to the government.
The department agrees that the true object of the contract between the Taxpayer and the government is for services. However, the subcontract between the Taxpayer and the video production company is for tangible personal property. As set out in Public Document 93-87 (3/29/87), the application of the tax to videotape production was addressed by the Virginia Supreme Court in WTAR Radio-TV Corporation v. Commonwealth of Virginia, 217 Va. 877, 234 S.E. 2d (1977). The Court noted the extensive services involved in videotape production (including studio time, artwork, and creative talent). Still, the Court held that the true object of the transaction was the tangible videotape transferred to the customer.
Accordingly, I find the transaction between the Taxpayer and the video production company is for tangible personal property used by the Taxpayer to provide its engineering services to the federal government. As such, the contested charges by the video production company are properly assessed.
Notwithstanding the above, I am concerned that this issue was not fully addressed in the Taxpayer's prior audit. The prior auditor noted that transactions with the same video production company were taxable. He also noted that during the prior audit period the video production company charged the Taxpayer the Washington, D.C. sales tax. It may be that the Washington tax was charged in error, or it may be that some element of the prior transactions differed from those in the current audit period (making them subject to the Washington tax). In any event, the auditor did not assess the Virginia tax on the prior audit period transactions.
For the current audit period, there is every indication that the assessment of Virginia tax is correct. I will agree, however, to assess this issue only on the sample period invoices and not extrapolate the charges over the entire audit period.
Charges Associated with Copy Machines Leases
FACTS: The Taxpayer leases copiers from a manufacturer. According to the lease agreement, the lessor charges a "minimum monthly lease payment' which is a lump-sum composed of charges for the use of the equipment and charges for its maintenance. In addition to the "minimum monthly lease payment,' the lease agreement specifies that additional monthly "meter charges' may also be imposed based on the actual usage of the equipment (measured by the number of copies made). The lease agreement indicates that the maintenance component means 'the maintenance charges and the meter charges, collectively.'
The sample invoices you provided to the department list two charges: (1) a total minimum monthly lease charge, and (2) an additional meter charge. The lessor charged the tax on the total minimum monthly lease payment. The lessor, however, charged the tax on one-half of the additional meter charges. The auditor assessed the untaxed additional meter charges. You question the assessment based on Code of Virginia § 58.1-609.5(9).
DETERMINATION: Code of Virginia § 58.1-609.5(9) provides that:
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- Beginning January 1, 1996, maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only.
The issue before us is whether the lessor's monthly additional meter charges constitute charges for maintenance contracts as set out in this statute.
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- Further, the term "maintenance contract' is defined in 23 VAC 10-210-910 as:
Any agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into.
- Further, the term "maintenance contract' is defined in 23 VAC 10-210-910 as:
Penalty Charges
You do not specifically protest the assessed penalty in your correspondence. note, however, that penalty charges have not been included with your payment of tax and interest on the uncontested issues.
No penalty is assessed on either of the contested issues. The auditor properly treated these as new issues (not subject to penalty charges) as set out in 23 VAC 10-210-2032(A)(6). Penalty was charged on the uncontested items because the compliance ratio on purchases was below the 85% needed to avoid penalty charges. This issue is addressed in 23 VAC 10-210-2032. Based on the information before me, the penalty on the uncontested purchases is correctly assessed.
Summary
Based on this determination, the assessment will be revised to assess the videotape charges as they are listed in the audit sample. These charges will not be extrapolated. A revised assessment will then be issued to the Taxpayer. Interest on the revised assessment will be accrued to 60 days from the date of your letter. No additional interest will accrue provided the revised assessment is paid within 30 days from the date of that revised assessment.
The documents referenced above are enclosed. Please contact ***** in the department's Office of Tax Policy at ******** questions concerning this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16796I
Rulings of the Tax Commissioner