Tax Type
Retail Sales and Use Tax
Description
Catalog creation
Topic
Taxability of Persons and Transactions
Date Issued
01-21-1988
January 21, 1988
Re: §58.1-1821 Application/ Sales and Use Tax
Dear*****************
This will reply to your letter and accompanying brief of August 24, 1987, seeking correction of assessments issued to ***************(taxpayers) in the above referenced case, for the period October 1982 through September 1985.
FACTS
The taxpayers are engaged in making retail sales of shoes through catalogs and in retail stores. During the period covered by the audit, the taxpayers designed and developed their own catalogs in an in-house art department. In order to produce the catalogs, the taxpayers purchased photographs, composition, typography, talent, art equipment, and similar items. After completion of the catalog production work, the taxpayers sent a print ready copy of the catalog to an outside printer for printing. As a result of the recently concluded audit, the taxpayers were held liable for the use tax on their untaxed purchases of photographs, composition, typography, etc., used in the production of their catalogs.
The taxpayers contest the assessment contending that the exemption in §58.1-608(30) of the Virginia Code for catalogs and other printed materials was intended to apply not only to certain purchases of catalogs and printed materials themselves but also to items for use in creating and designing such catalogs and printed materials, such as photographs, composition, etc. Furthermore, the taxpayers contend that the assessment on these items is unfair since a printer could have Purchased them pursuant to resale certificate of exemption.
The taxpayers also contend that their purchases of photographs. typography, composition, etc., which are essential to their catalog creation and production process, are comparable to purchases by a printer of items essential to its printing process, such as machinery, tools, and replacement and repair parts, which may be made exempt of the tax.
Furthermore, the taxpayers assert that since the department's catalog and other printed materials regulation, (Virginia Retail Sales and Use Tax Regulation (VR) 630-10-18.1), does not require the payment of the tax on purchases of items for use in the creation and design of catalogs, it must be inferred that such purchases qualify for tax exemption.
The taxpayers also seek the waiver of all penalties imposed in this case, contending that the items held taxable in the audit were not taxed in any prior audit, and since this is the first complete audit of the taxpayers since the catalog and other printed materials exemption was enacted.
Lastly, the taxpayers request a formal fact finding hearing under §9-6.14:12 of the Virginia Administrative Process Act. (APA), if the department does not rule in their favor.
DETERMINATION
Sections 58.1-603 and 58.1-604 of the Virginia Code impose the sales and use tax with respect to the sale or use of tangible personal property in Virginia. An exception to this general rule is set forth in Virginia Code Section 58.1-608(30), which for the period covered by the audit exempted the following items from the sales and use tax:
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- Catalogs and other printed materials used in the advertising of tangible personal property for sale, the envelopes, containers and labels used for packaging and mailing same. and paper furnished to a printer for fabrication into catalogs and other printed materials used in advertising tangible personal property for sale, when stored for twelve months or less in the Commonwealth and distributed for use without the Commonwealth.
- Catalogs and other printed materials used in the advertising of tangible personal property for sale, the envelopes, containers and labels used for packaging and mailing same. and paper furnished to a printer for fabrication into catalogs and other printed materials used in advertising tangible personal property for sale, when stored for twelve months or less in the Commonwealth and distributed for use without the Commonwealth.
Moreover, a review of the legislative history surrounding the enactment of the catalog and other printed materials exemption reveals no indication that the General Assembly intended to exempt purchases of tangible items to be used in the design and creation of a catalog or other printed matter. In addition, while purchases by a printer of items which become a component part of printed matter for sale or resale are not subject to the tax, such as ink, printing stock. staples, stapling wire, etc.. a printer would not enjoy a resale exemption on items such as those held taxable in the present audit, such as photographs, typography, composition, artwork, etc.
Furthermore, the purchases of items in this case cannot reasonably be compared to a printer's purchases of machinery, tools, repair parts, etc., for use in its printing process. While printers are entitled to an industrial manufacturing exemption on items used directly in the production of tangible personal property for sale or resale, such as machinery and tools, and their replacement parts, blotting papers, drying papers, and typesetting, the taxpayers' do not enjoy a similar exemption in making their purchases since they are not engaged in manufacturing tangible personal property for sale or resale. Therefore, I cannot agree that the taxpayers' purchases of photographs, composition, typography, etc., qualify for the industrial manufacturing exemption.
In addition, I cannot accept the taxpayers' reasoning that since the department's catalog and other printed materials regulation does not require the payment of the tax on items purchased for use in the creation of a catalog, it must be inferred that the department intended for all of such items to qualify for exemption from the tax. In drafting regulations. it is not possible for the department to anticipate and address all transactions which may or may not qualify for a particular exemption. For this reason, the department has traditionally solicited the input and participation of members of affected industries in the regulation development process. However, nothing in the department's catalog and other printed materials regulation development process supports the inference suggested by the taxpayers. In addition, to construe the regulation in the manner suggested by the taxpayers would require the department to ignore the rule of strict construction of all tax exemptions, cited above.
Notwithstanding the foregoing, effective July 1, 1986. the tax does not apply to "advertising" which is defined in §58.1-602(23) of the Virginia Code as the "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." In accordance with this exemption, the department recently revised Virginia Retail Sales and Use Tax Regulation (VR) 630-10-3, a copy of which is enclosed. Therefore, for any Periods after July 1. 1986, the taxpayers will not be liable for the tax on their purchases of concept, writing, graphic design, mechanical art, photography, and production supervision, for use in the creation of their catalogs.
With regard to the taxpayers' requests for the waiver of penalties, subsection C of VR 630-10-80 provides in Part that "[o]n a second or subsequent audit. a dealer is expected to demonstrate a higher degree of sales and use tax compliance. Penalty will not be waived on second or subsequent audits for other than exceptional mitigating circumstances." Although one of the taxpayers in this case was advised by the department of the need to improve its use tax compliance reporting procedures in a prior audit, no use tax was remitted to the department for the entire period covered by the present audit. Accordingly, I find no evidence of such exceptional mitigating circumstances which would justify the waiver of all penalties assessed in this case. However, the same regulation subsection cited above also provides that, "absent indications of fraud, penalty will be waived on the first audit of all taxpayers." Since this was the first audit of one of the taxpayers in this case, namely, ********the penalties applicable to this taxpayer will be waived in full. Moreover, since there has been a significant change in the law regarding the application of the tax to catalogs and other printed materials since the prior audit of the other taxpayer in this case, I also find basis for the waiver of all penalties applicable to purchases of items used in the production of catalogs.
Lastly, "the assessment of taxes or penalties under the tax laws" are exempted from the hearing requirements of the APA. (See, Va. Code §9-6.14:4.1.D). Therefore, the department does not entertain requests for APA fact finding hearings. However, if after a review of this determination, the taxpayers believe that a meeting with the department is still necessary to present issues not previously presented in this appeal, they should contact the department to arrange a meeting. If such a meeting is not requested within thirty days of the date of this letter, revised assessments will be issued to the taxpayers in a manner consistent with this opinion.
Based on all of the foregoing, other than the penalties mentioned above, I find no basis for correction of the instant assessments .
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner