Tax Type
Retail Sales and Use Tax
Description
Videotapes for foreign shipment; Possession taken in Virginia
Topic
Taxability of Persons and Transactions
Date Issued
02-13-1987
February 13, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear*****************
This will reply to your letter of July 15, 1986, in which you submit an application for correction of sales and use tax assessed to *********** as the result of a recent audit.
FACTS
*************** (Taxpayer) is engaged as a subcontractor to a firm performing a defense contract on foreign soil. The contractor has subcontracted with the taxpayer for the furnishing of videotape cassettes (videos) for showing over the contractor's closed circuit television system.
In the provision of its contractual obligations, the taxpayer enters into ordering and sublicensing agreements with various suppliers, who in turn ship videos to the taxpayer's Virginia film duplication facility. Here the videos are screened to verify that the proper tape was received and edited, if necessary, to remove commercial advertising. After being screened and edited, the videos are reproduced in order to provide replacements in the event that originals are damaged in shipment to foreign soil. After such reproduction, the original of each video is then shipped to the taxpayer's personnel on foreign soil, who air the videos over the contractor's closed circuit television system. An audit of the taxpayer produced an assessment for the taxpayer's use of the videos in Virginia in performance of its contractual obligation to furnish programming for the contractor's closed circuit television system.
The taxpayer contests the assessment, contending that its use of the videos in Virginia was in connection with its subsequent resale of the videos to the contractor and therefore exempt. Alternatively, the taxpayer contends that it acted as an export agent with respect to the videos, thereby exempting the transactions from the tax.
DETERMINATION
The taxpayer in this case has contracted with a defense contractor to furnish videos for airing over the contractor's closed circuit television system, which is located on foreign soil. In connection with this contract, the taxpayer obtains videos under ordering and sublicensing contracts from various suppliers, who deliver the videos to the taxpayer's Virginia facility.
It is asserted by the taxpayer that the videos are obtained for resale to the contractor; however, I have no evidence before me to support such a finding. In fact, it is my understanding that the videos are shipped from the taxpayer's Virginia facility to the taxpayer's personnel on foreign soil, who in turn physically operate the contractor's equipment. As such, the taxpayer does not sell a product, but provides a service, therefore, the resale exemption does not apply. Rather, the taxpayer is subject to the tax on all items of tangible personal property used in rendering the service.
Furthermore, no evidence has been submitted to suggest that the contractor has ever taken control of or title to the videos in question or that the videos have been relicensed for the contractor's use. To the contrary, the information before me suggests that the videos were licensed solely to the taxpayer and that the videos remain in the possession and control of the taxpayer at all times.
I also find no basis for exemption under the provisions of §58.1-608.20 of the Code of Virginia, which provides an exemption from the tax for the "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside the Commonwealth."
Even though the statute goes on to state that "[d]elivery of goods to a factor or export agent shall be deemed to be a delivery of goods for use or consumption outside the Commonwealth," it is well established that "[i]f a taxable event occurs in Virginia, subsequent delivery of the property outside this State does not immunize the taxable event," Commonwealth v. Pounding Mill Quarry, 215 Va. 647, 212 S.E.2d 428 (1975). Thus, as noted by the Virginia Supreme Court in Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980), the exemption does not apply to products merely "intended for distribution outside Virginia." Rather, as specifically stated in Virginia Regulation 630-10-51 on interstate and foreign commerce:
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- A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.
- A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.
Therefore, based on the information now before me, I cannot find sufficient basis for revision of the assessment issued to the taxpayer. However, the department will withhold collection activity on the contested portion of this assessment for 30 days if the taxpayer wishes to submit additional information to establish that the videos in question were actually resold to the contractor. Such information should be directed to the department's Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner