Tax Type
Retail Sales and Use Tax
Description
Video tapes; Government contractor
Topic
Taxability of Persons and Transactions
Date Issued
06-08-1987
June 8, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear **********************
This will reply to your letter of March 11, 1987, in which you request reconsideration of my February 13, 1987 determination regarding a sales and use tax assessment issued to ***************.
My earlier determination dealt with videotape cassettes purchased by the taxpayer for use in fulfilling its contractual obligations to operate and provide programming for a closed circuit television system owned by a defense contractor. You request a redetermination in this matter on the grounds that the tapes obtained by the taxpayer were resold to the defense contractor. Alternatively, you contend that the transactions represented the purchase of an intangible copyright, that the tapes are exempt as they will be aired over a licensed television station, and that the tapes are exempt materials for future processing or manufacturing into articles of tangible personal property for sale or resale.
As to your primary point, the department has been presented with no evidence whatsoever to support a finding that the tapes are indeed resold. Rather, all facts indicate that the taxpayer has contractually obligated itself to operate a closed circuit television system and in connection therewith to furnish programming. Accordingly, the taxpayer is performing a service and any items of tangible personal property (including the tapes in question) used in performing that service are subject to the tax. Furthermore, the tapes in question were apparently licensed for the taxpayer's use only. No evidence has been submitted to indicate that the tapes were relicensed to another party.
Based on the Virginia Supreme Court's opinion in WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977), you contend that a resale occurred as of the time the taxpayer aired the tapes over the defense contractor's closed circuit television system. However, this overlooks the fact that the taxpayer is not selling a tangible product; rather, the taxpayer is providing a nontaxable service. As such, the constructive delivery principle set forth in WTAR is inapplicable.
I also do not find basis for relief on the grounds that the acquisition of the tapes by the taxpayer represents the purchase of an intangible copyright. This is due to the fact that the license agreements in question provided the taxpayer not only with the right to use certain tapes, but also provided the taxpayer with the tangible tapes themselves. Were such transactions not subject to the tax, the General Assembly would not have chosen to exclude "the leasing, renting or licensing of copyright audio or video tapes, and films for public exhibition at motion picture theaters or by licensed radio and television stations" from the statutory definition of "lease or rental" found in §58.1-602.8 of the Code of Virginia.
Next, you contend that the instant transactions are excluded from the definition of a taxable lease or rental as the tapes are aired over a licensed television station. I disagree, however, as §58.1-602.8 of the Code of Virginia provides that the copyrighted tape must be for "public exhibition." In this case, the tapes are not available to the general public, but only to the employees of the defense contractor and others who have access to the closed circuit television system.
Lastly, you contend that the tapes are industrial materials for future processing or manufacturing into tangible personal property for sale or resale. However, as noted previously, the taxpayer does not sell tangible personal property; rather, it is engaged in providing a service. As such, any processing or manufacturing that is carried out by the taxpayer in connection with this service would not be entitled to the industrial exemptions set forth in §58.1-608.1 of the Code of Virginia.
Based on the foregoing, the assessment issued to the taxpayer is correct and remains due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner