December 29, 2014
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request correction of a retail sales and use tax assessment on behalf of ***** (the "Taxpayer"). The assessment was issued as a result of an audit for the period January 2007 through June 2012. On February 26, 2014, an unfavorable determination was issued in this matter on the basis that the requested documentation had not been submitted to the Department. Such documentation, however, was subsequently discovered by the Department. As such, the Taxpayer's claims are reconsidered below. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is an advertising business. An audit resulted in the assessment of consumer use tax on untaxed purchases of assets and other tangible personal property. The Taxpayer takes exception to the assessment and contends that certain purchases should not be included in the assessment because they were either purchased with tax paid or reported as taxable on returns. Also, the Taxpayer contends that the purchases were bought for resale purposes only or were included in a test period that was not representative of transactions throughout the audit period.
As a result of the documentation furnished, a request was made on August 11, 2014, for the Taxpayer to furnish additional documentation for line items 4, 9, 15, 16, 17, 20 and 25 of the audit report's expensed purchases exception list. A response was subsequently provided. Accordingly, this determination is based on all of the documentation furnished.
DETERMINATION
Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving that the assessment is erroneous is upon the Taxpayer. For appeals to the court, subsection D of Va. Code § 58.1- 1825 similarly sets out that it is the Taxpayer's burden "to show that the assessment or collection or action on a transferred credit or other tax attribute complained of is erroneous or otherwise improper."
Based on the Department's review of the documentation, I find that the following line items from the purchases exceptions list should be removed from the audit: Line items 2, 3, 5-8, 10-14, 18, 22, 24, 26, 27, 30-36, 38, 39, and 41. However, I find that the following line items should remain in the audit based on the documentation provided: Line items 4, 9, 15-17, 20 and 25. It appears that no documentation was furnished for the remaining line items (1, 19, 21, 23, 28, 29, 37, 40 and 42-46) of the purchases exception list.
In regard to the line items that will remain in the audit although documentation was furnished, I have listed the reasons for their inclusion in the audit as set out below.
Line item 4. This line item is for the purchase of DVDs and other related articles of tangible personal property in support of recruitment efforts. As such, this purchase is for promotional items. In addition, the Taxpayer's invoice (*****) to its client indicates that the Taxpayer was charging for "online, print, ad, [and] banner services." [Insert added.] At the Department's request, the Taxpayer furnished additional documentation. In regard to the order furnished for contract ***** ("Contract X"), the schedule indicates that the task order was for labor, on-line print ad/banner services, hiring events and travel expenses. The Taxpayer also furnished a document that was a response to Contract X. Such document describes the Taxpayer's background of designing recruitment campaigns, developing occupational specific materials, and placing multi-media advertisements. Such document goes on to describe how the Taxpayer will perform the activities requested by the government under the contract. Such activities include providing a menu of media sources, placement of advertising, job postings, identifying ad/banner graphics and sizing for all banner ad displays, and monitoring and altering the positioning and posting of all ads, banners and job listings throughout the contract period. In regard to hiring events, the Taxpayer was expected to assist the government with the advertising and marketing of the events. A letter from the government's contracting officer states the government's intention to exercise its option to extend the subject contract. A contract modification is furnished indicating that the contract's option period was exercised. A schedule included with such modification indicates that the Taxpayer is expected to provide expert advertising services in connection with agency advertising, branding and recruitment campaigns in accordance with the Statement of Work entitled "Agency Advertising." Such schedule also indicates that item no. 0007 is for "on-line print ad/banner services." Finally, another document sets out the objectives for the task order and requires the Taxpayer to conduct electronic recruitment campaigns, promotion of government recruitment events, the utilization of banner ads, print advertising, general recruitment support items (i.e., giveaways, such as pens, luggage tags, etc.), updating and repair of recruitment displays, and the provision of advertising and recruitment support services. Based on all of these documents, I must conclude that the task that the Taxpayer was hired to perform constituted media advertising services. Pursuant to subsection B 3 of Title 23 of the Virginia Administrative Code (VAC) 10-210-41, an advertising business' purchase of promotional items, such as pens, pencils, ash trays, calendars, balloons, t-shirts, etc., is subject to the tax, regardless of whether or not for use in a specific advertising campaign. Accordingly, line item 4 will remain in the audit.
Line item 9. Based on invoice *****, it appears that two cases with casters and loops for padlocks were purchased and delivered to the Taxpayer in Virginia. Because no sales tax was charged, the purchase is subject to the consumer use tax. The Department requested a copy of the task or contract order related to this purchase. The Taxpayer furnished a two-page work order 019, which lists four separate item numbers for supplies and services. The Taxpayer correctly indicates that item 00004 covers exhibit materials. A closer review indicates, however, that item 00004 also covers program management services. In fact, item 00004 combines two tasks, i.e., tasks 13 and 14 for a total award of *****. Whereas, the cases at issue cost *****, exclusive of freight. Based on this evidence, I find insufficient basis to conclude that the true object of item 00004 is for the resale of tangible personal property. Rather, because work order 019 requires the Taxpayer to furnish recruitment, branding and marketing services and materials, I must conclude that the Taxpayer provided media advertising services in connection with item 00004 and is thus liable for the tax on the exhibit materials. Absent any further clarifying documentation, line item 9 will remain in the audit.
Line item 15. Based on the vendor's invoice and the Taxpayer's purchase order, the Taxpayer purchased brochure printing. The purchase order references a particular project as the reason for the purchase. Additional documentation (task order or contract order) was requested to ascertain the Taxpayer's responsibilities under the project. A review of the additional documentation indicates that the task order is for the provision of advertising services. A review of the 2011 letter constituting modification 3 of the interim agreement indicates that the Taxpayer contracted to provide media advertising services, such as the review and improvement of current recruitment messages and vehicles, development of strategies for conducting advertising campaigns for hiring events, conducting market research, designing and developing creative materials, purchasing advertising, measuring effectiveness of advertisements, providing general recruitment and marketing recommendations, serving as the point of contact for all inquiries regarding the agency's advertising, and providing innovative marketing, advertising and branding services. This documentation provides unmistakable evidence that the Taxpayer contracted to provide media advertising services. In accordance with subsection B 3 of Title 23 VAC 10-210-41, the Taxpayer is liable for the tax on the cost price of brochures and other printed materials for use in connection with the media advertising campaigns desired by the agency. Because the resale exemption is not applicable, line item 15 will remain in the audit.
Line items 16 and 17. The Taxpayer's invoice to its client indicates that it was developing and updating existing brochures, as well as creating a career path map for inclusion in such brochures. Because the client would like to see a career path map targeted for high school and college level students, it appears that the brochures were used for promotional purposes. Additional documentation (the missing first page of the invoice, a contract and a purchase order) was requested to understand the Taxpayer's responsibilities under the project. Because these line items fall under the same contract order as addressed in line item 15 above, I must conclude that these line items were furnished to the government agency pursuant to a contract for media advertising services. In accordance with subsection B 3 of Title 23 VAC 10-210-41, the Taxpayer is liable for the tax on the cost price of brochures and other printed materials for use in connection with the media advertising campaigns desired by the agency. Because the resale exemption is not applicable, line items16 and 17 will remain in the audit.
Line item 20. Based on the purchase order, it appears that the Taxpayer has purchased stock executive pens that are designated for a client's promotional purposes. I note that the purchase order presented (PO-2610) does not appear to be the same purchase order (TM-1009226) referenced on the vendor's invoice. Pursuant to subsection B 3 of Title 23 VAC 10-210-41, an advertising business' purchase of promotional items, such as pens . . . etc., is subject to the tax, regardless of whether or not the purchase is for use in a specific advertising campaign. While additional documentation (a purchase order and a contract) was requested for this line item, the Taxpayer was unable to locate such documentation but furnished a "Project Management Plan," which lists task 7.8.1. While such task indicates the deliverables as various promotional items such as business cards, pens, lanyards and chapsticks, the task requires a labor element using a creative director, production manager and program manager. No explanation or documentation is given as to the specific services performed by these individuals. Because the Taxpayer is an advertising business and appears to have furnished some type of advertising services in connection with the provision of pens, the Taxpayer is liable for the tax on this purchase.
Line item 25. The Taxpayer's invoice to its client indicates a charge for videos involving a certain task order. Such invoice also references a contract number and other related contract references. The Taxpayer's purchase order to its client also references a specific project. Upon request, the Taxpayer furnished additional documentation, i.e., two orders for supplies or services. Page one of the first order lists marketing services and makes a reference to "task 12.10, RIF and other videos AFPC." The second order does not list any supplies or services but merely states "see line item detail." Such details were not furnished. Moreover, no other associated documentation about this matter was provided. Because the Taxpayer is an advertising business and appears to have provided marketing services based on the documentation provided, I must conclude that the Taxpayer provided media advertising services and is thus subject to subsection B 3 of Title 23 VAC 10-210-41. Absent convincing evidence that the Taxpayer did not provide any advertising services, such as concept, writing, graphic design, mechanical art, etc., for a promotional purpose, the Taxpayer has not met its burden of proof that such purchase should be removed from the audit on the basis of the resale exemption.
CONCLUSION
The audit will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23r° Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."
The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5674316607.R