Tax Type
Retail Sales and Use Tax
Description
Marketing management services/media and non media advertising campaigns
Topic
Accounting Periods and Methods
Subtractions and Exclusions
Taxable Transactions
Date Issued
03-17-2011
March 17, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period November 2002 through October 2008. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a strategic marketing firm that functions primarily as the marketing department for its clients. The Taxpayer provides strategy, creativity and production management services for its clients for media advertising and non-media campaigns. The issues raised by the Taxpayer in its appeal will be addressed separately below. Additionally, the Taxpayer has submitted an offer in compromise in conjunction with its appeal.
DETERMINATION
Relying on Va. Code § 58.1-609.6 4, the Taxpayer contests the inclusion of certain line items on the Contested Purchases and the Non-Contested exceptions lists. The Taxpayer maintains the contested items were produced for its client, located outside of Virginia. The Taxpayer states the materials generally were for distribution among its customer's existing clients. The Taxpayer states that the items it purchased were for resale and delivery to the customer outside Virginia. The Taxpayer states that the items were not part of a media campaign, and contends it cannot be deemed the user and consumer of the items.
Pursuant to Va. Code § 58.1-609.6 5, the retail sales and use tax does not apply to "[a]dvertising as defined in § 58.1-602." Virginia Code § 58.1-602 defines advertising as:
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- The 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. Any person providing advertising as defined herein shall be deemed the user or consumer of all tangible personal property purchased for use in such advertising."
Title 23 of the Virginia Administrative Code 10-210-41 B provides, in pertinent part:
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- Advertising businesses are engaged in providing professional services and are the users and consumers of all tangible personal property purchased for such businesses. Therefore, the tax applies to all purchases by an advertising business, including:
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- Printing, including direct mail items, non-customized or stock mailing lists, handbills, brochures, flyers, bumper stickers, posters and similar printed materials whether or not for use in the development of a specific advertising campaign, and whether or not any of such materials are intended for distribution out of state; and
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- Promotional items, including pens, pencils, ash trays, calendars, balloons, tshirts and similar items whether or not for use in a specific advertising campaign, and whether or not such items are intended for distribution out of state.
Virginia Code § 58.1-609.6 4 states, in pertinent part, that the retail sales and use tax does not apply to:
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- Catalogs, letters, brochures, reports, and similar printed materials, except administrative supplies, the envelopes, containers and labels used for packaging and mailing same, and paper furnished to a printer for fabrication into such printed materials, when stored for 12 months or less in the Commonwealth and distributed for use without the Commonwealth. As used in this subdivision, "administrative supplies" includes, but is not limited to, letterhead, envelopes, and other stationery; and invoices, billing forms, payroll forms, price lists, time cards, computer cards, and similar supplies. Notwithstanding the provisions of subdivision 5 of this section or the definition of "advertising" contained in § 58.1-602, (i) any advertising business located outside the Commonwealth 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 this subdivision, and (ii) from July 1, 1995, through June 30, 2002, and beginning July 1, 2002, and ending July 1, 2012, 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 or this subdivision, provided that the advertising agency shall certify to the Tax Commissioner, upon request, that such printed material was distributed outside the Commonwealth and such certification shall be retained as a part of the transaction record and shall be subject to further review by the Tax Commissioner.
Contested Purchases
Line Items 1 and 10
Based upon the information provided, the amount held in the audit with respect to Line Item 1 is for the purchase of crayons by the Taxpayer for its customer. The amount held in the audit with respect to Line Item 10 is for the purchase of stickers by the Taxpayer for its customer.
The crayons and stickers at issue are deemed promotional items as considered in Title 23 VAC 10-210-41 B. Pursuant to the regulation, the Taxpayer is the taxable user and consumer of such items. Accordingly, the charges for these items were properly included in the Contested Purchases exceptions list. Virginia Code § 58.1-609.6 4 does not apply in this instance because the items of tangible personal property at issue are not printed materials as considered in the statute.
Line Items 2 and 13
Pursuant to Va. Code § 58.1-205, "Any assessment of a tax by the Department shall be deemed prima facie correct." Accordingly, taxpayers have the burden of proving that the tax as assessed by the Department is incorrect.
In regard to the line items at issue, the Taxpayer has not provided sufficient documentation to support its contention that these transactions were improperly included in the Contested Purchases exceptions list in the audit. The Taxpayer has not met its burden of proving that the assessment is incorrect as issued. Accordingly, an adjustment to the assessment with respect to these line items is not warranted, and the inclusion of these transactions is deemed proper.
Line Items 3 through 8
The Taxpayer contends that these line items should be removed from the Contested Purchases exceptions list because they represent exempt purchases of printed materials.
During the performance of the audit the Taxpayer indicated that 8.9 percent of the tangible personal property purchased in the transactions represented by these line items remained in Virginia.
Pursuant to Va. Code § 58.1-609.6 4, the purchase of printed materials is not subject to the retail sales and use tax if stored in Virginia for 12 months or less and distributed for use outside of Virginia. Both in the audit and on appeal the Taxpayer has not proven that the property at issue in these line items was stored in Virginia for 12 months or less and distributed for use outside Virginia. The Taxpayer has the burden of proving that the tax as assessed is incorrect. Accordingly, the inclusion of these transactions in the audit is correct and they will not be removed from the Contested Purchases exceptions list.
Line Item 9
On appeal, the Taxpayer has provided the invoice for the transaction at issue. The invoice states that the property purchased was to be shipped to the Taxpayer's customer in Washington, D.C. Accordingly, this transaction will be removed from the Contested Purchases exceptions list.
Line Items 11 and 12
Relying on Va. Code § 58.1-609.6 4, the Taxpayer maintains that these line items represent printed materials that were improperly included in the Contested Purchases exceptions list.
Pursuant to Va. Code § 58.1-609.6 4, the purchase of printed materials is not subject to the retail sales and use tax if stored in Virginia for 12 months or less and distributed for use outside of Virginia. The invoices provided in this instance do not include a "ship to" address. Additionally, the Taxpayer has not provided any additional documentation demonstrating that these items where stored and distributed as considered in the statute. The Taxpayer has not met its burden of proving that these transactions were improperly included in the audit. Accordingly, the transactions will not be removed from the Contested Purchases exceptions list.
Non Contested Purchases
Line Item 26
Relying on Va. Code § 58.1-609.6 4, the Taxpayer maintains that this transaction is improperly included in the audit. The Taxpayer maintains that this transaction is for an exempt purchase of printed materials. The printed materials at issue are letterhead and business cards purchased by the Taxpayer for one its customers.
Virginia Code § 58.1-609.6 4 provides that the printed materials exemption does not apply to administrative supplies. Pursuant to the statute, the letterhead and business cards at issue are deemed administrative supplies, and the exemption does not apply to the purchase of these items. Accordingly, the inclusion of this transaction in the audit is correct and will not be removed.
Line Item 27
The Taxpayer contends that this line item should be removed from the NonContested Purchases exceptions list because it represents an exempt purchase of printed materials.
During the performance of the audit the Taxpayer indicated that 8.9 percent of the tangible personal property purchased in the transactions represented by this line item remained in Virginia.
Pursuant to Va. Code § 58.1-609.6 4, the purchase of printed materials is not subject to the retail sales and use tax if stored in Virginia for 12 months or less and distributed for use outside of Virginia. Both in the audit and on appeal the Taxpayer has not proven that the property at issue in this line item was stored in Virginia for 12 months or less and distributed for use outside Virginia. The Taxpayer has the burden of proving that the tax as assessed is incorrect. Accordingly, the inclusion of this transaction in the audit is correct and will not be removed from the Contested Purchases exceptions list.
Contested Sales
The Taxpayer is contesting transactions represented in the 10 line items included in the Contested Sales exceptions list. The Taxpayer maintains that the taxable amounts listed include charges for postage that should be removed. Finally, the Taxpayer states that the total measure amount should be reduced to reflect the fact that 65 percent of the sales were made to the Taxpayer's customer in Virginia.
Postage
The documentation provided by the Taxpayer with its appeal in support of its contention that the taxable amounts for the line items erroneously includes the cost of postage, is the same documentation that was provided during the performance of the audit to the Department's audit staff. Based upon a review of the documentation provided and a review of the documentation provided during the audit, the taxable amounts included on the Contested Sales exceptions list do not include any charges for postage. The charges for postage were removed from the taxable amounts during the performance of the audit. Accordingly, a revision to the Contested Sales measure is not warranted in this instance.
Virginia Sales
In support of its contention that the sales measure be reduced to reflect the percentage of sales in which the property remained in Virginia, the Taxpayer provided a Mailing Counts Summary for April. The document has an April 2006 fax date on it, but the document does not expressly state the year that the summary represents. In the audit, calendar year 2006 was used for the sales sample period. Even if the document provided represents April 2006, it is impossible to know if it is truly representative of mailing counts for the sample period. Pursuant to Va. Code § 58.1-205, the Taxpayer has not provided sufficient documentation to prove its contention that the sales measure should be reduced by 65 percent. Accordingly, no change to the sales measure is warranted in this instance.
Advertising Campaign Charges
The Taxpayer also contends that the total measure amount for the purchases should be reduced by the amount of money paid by the Taxpayer to its vendor for the development of an advertising campaign.
Neither the Contested Purchases nor the Non-Contested Purchases exceptions lists contain charges for advertising campaign development paid to ***** and *****. These charges were not included in the purchases exceptions lists because the Taxpayer made the purchases for resale. Accordingly, a change is not warranted in this instance.
Nonfiler/Audit Period
The Taxpayer was assessed tax in the audit on sales it made exempt of the tax. Additionally, it was determined in the audit that the Taxpayer did not file sales tax returns for the audit: period, and the audit period was extended for 3 additional years. The Taxpayer contests the assessment of tax and states that it was instructed by Department personnel that it was not required to charge, collect and remit the sales tax. The Taxpayer also states that it was instructed by Department personnel that it was not required to file sales tax returns with the Department because the Taxpayer operates as a marketing agency.
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- Virginia Code § 58.1-634 states:
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- The taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be begun without assessment, at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so. [Emphasis added.]
The Taxpayer did not file sales and use tax returns as required by the Va. Code § 58.1-634. Accordingly, the three year extension of the audit period was proper and will not be adjusted.
Virginia Code § 58.1-1835 states:
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- The Tax Commissioner shall abate any portion of any tax, interest, and penalty attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity if:
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- 1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
3. The facts of the case described in the written advice and the request therefor are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.
- 1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
In order to receive an abatement of any portion of the tax, interest, and penalty assessed, the Taxpayer would need to show that it had received written guidance from a Department employee as provided in Va. Code § 58.1-1835. The Taxpayer has not demonstrated that the criteria of Va. Code § 58.1-1835 have been met. Accordingly, the Taxpayer is not entitled to an abatement of any portion of the audit assessment on this basis.
Offer in Compromise
The Taxpayer also requests an offer in compromise based on doubtful liability. The Taxpayer requests a waiver of one-half of the interest assessed and all penalties assessed. In support of its proposed offer in compromise, the Taxpayer states it received incorrect information from Department personnel regarding its responsibility to charge, collect and remit the retail sales and use tax on certain sales made in connection with its marketing business. The Taxpayer also indicates that contesting the appeal and having to pay the entire assessment is a financial burden on the business.
Virginia Code § 58.1-105 B states, "The Tax Commissioner may compromise and settle doubtful or disputed claims for taxes or tax liability of doubtful collectibility."
As stated previously, the Taxpayer has not demonstrated that it received written guidance, as required under Va. Code § 58.1-1835. Therefore, I am unable to grant any relief pursuant to this statute. Additionally, the Taxpayer has not proven that doubtful liability exists in this instance. Accordingly, I am unable to grant any relief under an offer in compromise based on doubtful liability.
Notwithstanding the foregoing, the Tax Commissioner is authorized to compromise and settle tax liability of doubtful collectibility. In order for an offer based on doubtful collectibility to be considered by the Tax Commissioner, evidence of doubtful collectibility must be presented to support your claim. If you wish to pursue an offer based on doubtful collectibility, please complete and return the enclosed Collection Information Statement for Businesses. This form will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based on the information presented. Please return the completed form to the Department's Collections Section, Offer in Compromise Team, Post Office Box 1880, Richmond, Virginia 23218-1880. You may also contact a member of this team at (804) 367-8045.
CONCLUSION
In accordance with this determination, Line Item 9 of the Contested Purchases exceptions list will be removed from the measure and the audit will be revised. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****. Should the Taxpayer choose to pursue an offer in compromise based upon doubtful collectibility, the Taxpayer must file a completed Collection Information Statement for Businesses Form within 30 days from the date of the bill. If not received within the allotted time frame, it will be presumed that no additional information will be submitted, and the revised outstanding liability will become immediately due and payable.
The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-3730480051.P
Rulings of the Tax Commissioner