Tax Type
Retail Sales and Use Tax
Description
Services; Specialized word processing products
Topic
Taxability of Persons and Transactions
Date Issued
12-14-1990
December 14, 1990
Dear ****
This will reply to your letter dated July 31, 1990, in which you seek the correction of sales and use tax assessed your client * * * as the result of a recent audit.
FACTS
* * * (the "Taxpayer") is in the business of preparing specialized word processing products for clients. The Taxpayer was audited for the period April 1984 through December 1989 and held liable for sales and use tax on sales of copies, repetitive letters, and labels. The Taxpayer was also held liable for its failure to remit use tax on items purchased out-of-state.
The Taxpayer contests the application of the tax to its business on the grounds that it produces "custom" documents. It maintains that it is providing an exempt service and thus it is not liable for the tax.
DETERMINATION
I will address the four areas of contention on a separate basis below:
Copies
The department has traditionally held that companies engaged exclusively in typing or word processing are providing a personal service, rather than selling tangible personal property. However, if a word processing company goes beyond the rendition of a service and also bills its customers for the production of multiple copies of a document, it is engaged in making retail sales of tangible personal property and must charge the tax. When in addition to editing and formatting the original of a document, the Taxpayer also produces numerous copies of the document, the separately stated charge for the editing and formatting services will be tax exempt, while the charge for the additional copies will be taxable. In contrast, if the Taxpayer merely produces multiple copies of a document which was previously edited and formatted, the total charge for the copies will be taxable. Thus, the Taxpayer is liable for the tax in this instance.
Repetitive Letters
When the Taxpayer produces repetitive letters using a slight variation to personalize essentially the same letter, the tax applies to the total charge for the provision of such letters. However, if each letter provided by the Taxpayer is individually created, the charge for the production of each such individually created letter will qualify for exemption from the tax.
In the instant case, it is my understanding that the letters the Taxpayer produces are repetitive letters, and are not individually created. Thus, the tax was correctly applied.
Labels
The true object sought by a client in purchasing mailing labels is the acquisition of the tangible labels themselves. Thus, while customized mailing lists are exempt from the tax as the true object is the acquisition of the service of transforming intangible information into a list, labels are themselves physically separated and attached to something, and not merely intangible information.
In contrast, when the Taxpayer merely types names and addresses on pre-printed envelopes, cards or forms provided by a client which already contain generic information, the tax will not apply to the charge for such service, unless it is made in conjunction with the sale of taxable documents.
The tax also does not apply to letters, brochures, reports and similar printed materials (except administrative supplies), and the envelopes and labels used for mailing when stored for twelve months or less in Virginia and mailed to or distributed outside of Virginia.
It is my understanding that some of the labels which were taxed in the audit were for mailing lists and for the service of addressing cards. If this is the case and the Taxpayer can substantiate which items fall under this category, they will be removed from the audit.
Use Tax
Typically, the use tax applies to tangible personal property purchased from dealers outside Virginia who are not registered for the collection of the Virginia sales tax. However, the use tax also applies to property purchased within Virginia upon which the sales tax was not paid.
While dealers are legally required to collect and remit the sales tax on all sales or leases of tangible personal property, Va. Code § 58.1-625 makes the tax the legal debt of the purchaser. This has been recognized by the federal courts, which have held that "the legal incidence of the Virginia sales and use is on the purchaser." United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir 1978). As such, the Department may proceed against either the seller or the purchaser in instances where the tax has (not) been collected or paid.
I trust that this will answer the questions raised in your appeal. Based upon the policies set forth in this letter, I am asking the Department's Technical Services Section and ********** District Office to review the audit to determine if any adjustments are necessary with regard to the tax treatment of mailing lists and labels and issue any refund which may be due to the Taxpayer under separate cover. If no adjustments are necessary, the amount remitted will be deemed payment in full of the assessment.
For your information, I am enclosing copies of P.D. 86-164, P.D. 87-246 and P.D. 88-254 which further address the application of the tax to businesses similar to the Taxpayer.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner