Tax Type
Retail Sales and Use Tax
Description
Graphic design business; Criteria for manufacturing exemption
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
04-12-1990
April 12, 1990
Re: Request for Ruling/ Sales and Use tax
Dear******************
This will reply to your August 28, 1989 letter requesting a ruling on the application of the sales and use tax advertising exemption to your graphic design business. We regret the delay in providing you with a response to your inquiry.
Facts
**********("the Taxpayer") specializes in the provision of concept and graphic design for use in the development of state-of-the-art packaging. The Taxpayer is also an authorized contracted agent for several manufacturers engaged in the production of packages. The Taxpayer bills its customers for only the provision of concept and graphic design. The customers are billed directly by the manufacturers for the actual production of the packages. On occasions, the Taxpayer will contract with a third party to perform graphic design services under the Taxpayer's direction. In such instances, the Taxpayer provides the third party with a sales and use tax certificate of exemption, Form ST-10A, to substantiate the exempt sale of graphic designs to the Taxpayer. The Taxpayer has registered to collect the tax on any taxable sales.
The Taxpayer requests a ruling on the application of the sales and use tax to the various transactions in which it engages.
RULING
Since July 1, 1986, Virginia Code §58.1-608(6)(e) has provided an exemption from the sales and use tax for "advertising" which is defined in §58.1-602 of the 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. 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).
Consistent with the foregoing, the department promulgated Virginia Retail Sales and Use Tax Regulation (VR) 630-10-3: Advertising, copy enclosed.
Accordingly, when providing services in the production of advertising for placement in the "media", as defined in subsection 1 of the enclosed regulation, advertising businesses are the providers of a nontaxable professional service. Therefore, the total charge to its customers for the provision of media advertising including charges for consulting services, creative or design services, production supervision, or media placement services is not subject to the tax. However, all purchases by an advertising business of materials for use in the creation of such media advertising are subject to the tax at the time of purchase.
The department has interpreted the term "media" to include the traditional media such as radio, television, and newspapers, as well as other similar forms of mass communication. Therefore, to determine if a particular mode of communication developed by an advertising business qualifies for tax exemption as "media advertising", it is necessary to determine whether the communication mode is intended to convey promotional information to the public generally.
In addition, under §2(A) of VR 630-10-3, "[t]he tax does not apply to charges by an advertising business for the provision of concept, writing, graphic design, mechanical art, photography and production supervision in the development of an advertising campaign, whether or not all aspects of the campaign are actually performed by the same advertising business. For example, charges by an advertising business for concept, writing, graphic design, mechanical art, photography, etc..., provided by another advertising business, for use in the development of an advertising campaign are not subject to the tax." (Emphasis added).
Applying the facts presented in your letter to the statutes and regulation cited above, the Taxpayer is providing an exempt media advertising service when it provides concept and graphic design for packaging intended to convey promotional information to the public generally. However, on those occasions when the Taxpayer provides creative and design services resulting in a tangible product in connection with some non-media related project of its client, such as in the design of packaging for an in-house directory, employee handbook, in-house training manual (e.g., customer service manual), product manual, or other item intended to be used for some non-promotional administrative purpose, its total charge for the provision of concept and design of such items will be subject to the tax. For such non-media related projects, the Taxpayer may purchase exempt of the tax, pursuant to resale certificate of exemption (Form ST-10), copy enclosed, any tangible items purchased for use in the creation of such non-media advertising which will be resold to clients subject to the tax.
Finally, under §2(A) of the above regulation, the Taxpayer is correct in providing Form ST-10A to other advertising businesses in instances where such businesses provide the Taxpayer with graphic designs for use in media advertising.
I hope that this has answered your questions; however, please contact the department if you have further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner