Document Number
14-4
Tax Type
Retail Sales and Use Tax
Description
Assessment of sales tax on untaxed sales of tangible personal property.
Topic
Records/Returns/Payments
Tangible Personal Property
Taxable Transactions
Taxpayers' Remedies
Date Issued
01-16-2014

January 16, 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 the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period September 2006 through August 2012. I apologize for the delay in responding to your request.

FACTS


The Taxpayer is a graphic design business. An audit resulted in the assessment of sales tax on untaxed sales of tangible personal property.

The Taxpayer contests part of the assessment that it claims as exempt professional services, i.e., the labor of graphic designers, web masters, etc., to research, develop and implement advertising media campaigns for clients. The Taxpayer indicates that it has been paying tax on tangible items. For those tax payments, the Department's auditor gave credits in the audit that reduced the taxable measure. The Taxpayer claims to have been verbally told by a Department employee in 1993 to pay the tax upfront on such items. The Taxpayer also cites as further support a provision from the first paragraph of subsection A of Title 23 of the Virginia Administrative Code (VAC) 10-210-41. The Taxpayer requests the abatement of the contested assessment.

DETERMINATION


The first paragraph of subsection A of Title 23 VAC 10-210-41 pertains to ad creation and provides the following:
    • 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 regardless of how such charges are computed by the advertising business and whether or not such business actually places the advertising in the media.

To support the Taxpayer's claim that it provides professional advertising services, a member of the Department's Appeals and Rulings staff contacted the Taxpayer and requested complete documentation (e.g., sales invoices, purchase orders, contracts and any other job related documentation) for the 24 sales transactions included in the audit. The Taxpayer provided some of the requested documentation and the Department's auditor provided some additional documentation obtained from the Taxpayer during the audit. The documentation furnished is for 13 of the 24 sales transactions at issue.

Pursuant to Va. Code § 58.1-205, an assessment issued by the Department is deemed prima facie correct. This means that the burden is upon the Taxpayer to prove that the assessment is erroneous. In the absence of any documentation for the line items 2, 3, 7, 9, 13, 14, 17, 18, 21, 22, and 23 of the contested sales exception list, the Taxpayer has not met its burden of proof. Accordingly, there is no basis to remove those transactions from the audit.

In regard to the other transactions for which some type of documentation was furnished, the sales invoices furnished had limited information on them, such as the amount being billed. In some instances, a Statement of Work (SOW) is furnished, but the description of the work is inadequate to support the Taxpayer's claim. It also appears that no further information is available from the Taxpayer because of the loss of information caused by a major hard drive crash that the Taxpayer experienced two years ago.

If the information presented is the extent of the available information, then it is not possible to conclude from most of the documentation furnished that the Taxpayer was acting in the capacity of an advertising business in each of these contested sales transactions. A review of the documentation provided indicates the following in regard to the contested sales exception list:
    • Lines 1, 4 and 6: A SOW is provided. Such SOW indicates that the Taxpayer was required to produce corporate brochures. This SOW was for a revised layout of an existing design to accommodate new product pictures. Based on the description provided in the SOW, there is no indication that this job was for anything more than a print job. No advertising services are indicated in the SOW. There is no mention of an advertising campaign or purpose. Nor was there any transactional documentation furnished from the client or the Taxpayer indicating how the client was going to use the corporate brochures. Because the SOW does not provide conclusive evidence of an advertising purpose, the Taxpayer has not met its burden of proof. For these reasons, these items will remain in the audit.
    • Line 5: An invoice was furnished that indicates a billing for two logo signs for the rear of a pop-up exhibit. The invoice provides no indication of how the exhibit will be used or whether the Taxpayer planned, created or placed the logo signs for use only in the media. As such, the invoice provides insufficient information to conclude that the logo signs constituted charges for media advertising services. Absent any indication that the Taxpayer performed advertising services in this transaction, I must conclude that no advertising services were performed. Instead, I must conclude that the transaction is for the taxable sale of tangible personal property and must remain in the audit.
    • Line 10: An invoice was furnished by the auditor. Such invoice indicates that the transaction is for graphic panels for an exhibit update. No other documentation is furnished. For the same reasons stated above for line 5, the documentation does not support the Taxpayer's claim that the transaction is for advertising services. Rather, based on this invoice, it appears that the transaction is taxable as a sale of tangible personal property. Accordingly, this item will remain in the audit.
    • Line 11: An invoice was furnished by the auditor. Such invoice indicates that the transaction is for a rail day sign, i.e., a red corporate panel. No other documentation is furnished. For the same reasons stated above for line 5, the documentation does not support the Taxpayer's claim that the transaction is for advertising services. Rather, based on this invoice, it appears that the transaction is taxable as a sale of tangible personal property. Accordingly, this item will remain in the audit.
    • Lines 8 and 12: Invoices #040511 and #052611 were furnished by the auditor. These invoices are the initial and second billings for 1,500 copies of an eight-page booklet. No other documentation is furnished. For the same reasons cited above for line 5, the documentation does not support the Taxpayer's claim that the transaction is for advertising services. Rather, based on these invoices, it appears that the transaction is a print job and is taxable as a sale of tangible personal property. Accordingly, this item will remain in the audit.
    • Lines 15 and 16: A SOW is provided. A spec sheet estimate contains a brief description requiring the Taxpayer to produce one spec sheet to include the layout and design of the front and back based on prior spec sheets. The client furnished the technical copy and performance charts, data and graphs. The Taxpayer edited the technical copy and provided up to 250 words of sales copy. The Taxpayer provided close-up photography of the product. The existing client logo was utilized. The client received a pdf proof for final approval before printing. No other related documentation was furnished. For the same reasons stated above for line 5, the documentation does not support the Taxpayer's claim that the transaction is for advertising services. Rather, based on this SOW, it appears that the transaction is a print job and is taxable as a sale of tangible personal property. Accordingly, this item will remain in the audit.
    • Lines 19 and 20: A SOW is provided. Such SOW indicates that the Taxpayer was required to furnish graphic panels to fit an existing pop-up exhibit for the transit market. This job required the Taxpayer to provide the full graphic panel layout and design, copywriting, editing, photography, stock photos, pdf proofs for client approval and the podium graphic panels. Because the panels are intended for use on an exhibit targeted to the transit market, i.e., a media audience, it appears that the transaction was for media advertising services. Accordingly, these line items will be removed from the audit.
    • Line 24: Invoice #091409 is provided. Such invoice indicates that the transaction charges are for two red corporate hallway suite signs and two podium panels. No other documentation is furnished. For the same reasons stated above for line 5, the documentation does not support the Taxpayer's claim that the transaction is for advertising services. Rather, based on this invoice, it appears that the transaction is taxable as a sale of tangible personal property. Accordingly, this item will remain in the audit.

Although the Taxpayer indicates that it does not contest the non-contested portion of the audit, the Taxpayer furnishes a copy of invoice #040711, which appears to have been assessed on either line 5 or 6 of the non-contested sales exception list. While the description on such invoice states that it is a billing for a two-sided "REMAN Certs" sign for an exhibit, there is no description on the invoice that provides any clear indication that the transaction is for concept and design advertising services. Furthermore, hallway signs and podium panels may not fit usage in the media and could be considered non-media property. No other related documentation is furnished. Based on information furnished and the lack of clear evidence to the contrary, I cannot conclude that the transaction is for media advertising services. Rather, based on the invoice's description, it appears that the transaction is for the sale of tangible personal property. As such, these line items will remain in the audit.

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 the address shown on the revised bill.

The Taxpayer claims that it will be forced to file for bankruptcy and cease business in the state if it is liable for the assessment. To avoid such an occurrence, I am willing to consider a payment plan for the contested assessment of up to three years to allow the Taxpayer sufficient time to pay the outstanding balance. Please contact the Department at (804) 367-8045 if such a payment plan is desired.

Please note that failure to remit full payment within the 30-day period or to agree to a payment plan with the Department 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 and regulation sections 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/1-5451117471.R

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46