April 19, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the period January 2012 through December 2014. I note that the assessments have been paid. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a full service graphics design firm specializing in marketing, communications, corporate identity and branding, advertising and media, outreach and communications. The Department's audit disclosed that the Taxpayer was making purchases of printing and office and computer supplies on which the sales tax was not paid to vendors nor the use tax accrued and remitted to the Department.
The Taxpayer questions the inclusion of certain printing purchases in the Department's sample computations and their extrapolation over the entire audit period. The Taxpayer is also concerned that the Department is applying the tax to printed materials that were part of an education and outreach program for a nonprofit organization that provided the Taxpayer with its tax exemption certificate. The Taxpayer disagrees with the application of the use tax on printing, and contends it made no use of the printed materials that were specific to the customer's campaign to attract volunteers. The Taxpayer seeks a revision of the audit for the printing purchases at issue and a refund of the use taxes paid to the Department.
DETERMINATION
Advertising
Virginia Code § 58.1-609.6 5 provides an exemption from the sales and use tax for “advertising,” which is defined in Va. Code § 58.1-602 as:
[t]he 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 to be the user or consumer of all tangible personal property purchased for use in such advertising. [Emphasis added.]
Title 23 of the Virginia Administrative Code (VAC) 10-210-41 A, which interprets the cited exemption, states:
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.
Title 23 VAC 10-210-41 B explains that advertising businesses are engaged in providing professional services and are the users and consumers of all tangible personal property purchased for use in such businesses. The tax applies to all purchases by an advertising business, including printing.
Title 23 VAC 10-210-41 B 2 also specifically states that the tax applies to all purchases by an advertising business including, without limitation:
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 a specific advertising campaign....
In this instance, the Taxpayer entered into a contract with a nonprofit organization to develop a marketing campaign that would promote volunteerism by the general public. There is no exception set out in the statute or in Title 23 VAC 10-210-41 for printed materials purchased for use in advertising for nonprofit organizations. Exemptions from the sales and use tax for nonprofit organizations are generally for tangible personal property that the nonprofit organization purchases for its use or consumption. In this case and based on the wording in Va. Code § 58.1-609.6 5, the printed materials at issue were purchased by the Taxpayer in its fulfillment of the marketing campaign for the nonprofit organization. The final charge to the nonprofit organization includes costs that the Taxpayer incurs as a part of its development of the advertising campaign. Accordingly, the printing costs are a part of the Taxpayer's cost of doing business as an advertising business, and the use tax applies to such printing costs. The nonprofit organization's exemption does not apply to this transaction.
The foregoing decision is similar to prior determinations by the Tax Commissioner in Public Documents (P.D.) 95-88 (4/28/95) and 93-113 (4/29/93). In P.D. 95-88 a taxpayer questioned its liability for materials purchased for use in advertising for nonprofit clients. The Tax Commissioner's response provides that based on Va. Code § 58.1-609.6 5 and as supported by the regulation Title 23 VAC 10-210-41 (formerly VR 630-10-3), there was no exception set out in either of the referenced authorities for printed materials purchased for use in advertising for nonprofit organizations. P.D. 95-88 further states that exemptions from the sales and use tax for nonprofit organizations are generally for tangible personal property for use or consumption by the nonprofit organization. In this particular case, the printed materials were purchased for the use and consumption by the taxpayer in its advertising business and were properly subjected to the tax.
In P.D. 93-113, the Tax Commissioner referenced Title 23 VAC 10-210-41 B 2 to address an advertising business that purchased brochures on behalf of its client, a local government entity. The brochures were for the purpose of promoting tourism and economic development for the Virginia local governmental entity. The advertising business questioned if it was liable for the tax on the printed materials purchased on behalf of its client, the local governmental entity, in conjunction with an advertising project.
The Tax Commissioner responded that printed materials purchased by an advertising business in conjunction with an advertising project are subject to the tax, regardless of the existence of any exemption that may be enjoyed by its client. Therefore, when the advertising business purchased the printed brochures on behalf of the local government for the government's promotion of tourism and economic development in that locality, the purchase of the printed materials was taxable to the advertising business rather than the governmental entity since the advertising business was using and consuming the printing in the performance of an advertising campaign.
Sample Computation
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which the Virginia tax has not been paid.
The purpose of the sample is to determine an error factor for the entire audit period and not a single year as suggested by the Taxpayer. In this instance, the auditor sampled the year 2014 and found purchases of printing that were untaxed. These transactions became the basis for the computation of the error factor that was applied to the expense totals derived from the Taxpayer's Profit and Loss (P&L) statements for 2012, 2013 and 2014. The resulting error factor was then applied to the monthly breakdown of the expense totals to determine taxable amounts for those likely similar transactions on which the Virginia tax was not paid. Based on the Taxpayer's P&L figures, similar printing expenses were present in 2012 and 2013, making it likely that similar errors were made regarding the payment of the tax on purchases used in advertising campaigns during those years. Based on a review of the audit calculations, I find that the auditor's sample methodology was properly applied.
Based on the foregoing, I find no basis for an adjustment of the Department's audit results. The Department's assessment is correct, and no refund is warranted.
The Code of Virginia sections, regulations and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this matter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/604.Q