Tax Type
Retail Sales and Use Tax
Description
Printing of Real Estate Ad Magazines
Topic
Taxability of Persons and Transactions
Date Issued
05-15-1991
May 15, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your letter of April 24, 1990 contesting a sales and use tax assessment to your client, *************** (the "Taxpayer") for the period April 1, 1984 through December 31, 1989.
FACTS
The Taxpayer, whose principal place of business is in another state, is involved in the printing of real estate advertising magazines which are ultimately distributed free of charge. It enters into franchise agreements with individuals and corporations in Virginia to seek advertising for its magazines. It charges its franchisees a royalty fee for the use of the trade name, a fee for the cost of printing, and a fee for shipping the magazines to Virginia. It was audited and found to have failed to remit the sales tax on sales of magazines to Virginia businesses.
You maintain that since the Taxpayer does not maintain sales, property or employees in Virginia and that its only connection with Virginia is its franchisees and another independent contractor whose primary function is to locate additional franchisees, it does not have sufficient nexus to require the collection of sales tax on sales to Virginia customers. Additionally, you maintain that: (1) the magazines published by the Taxpayer qualify as exempt publications under Va. Code §58.1-608(6)(c); (2) the printing fees paid to the Taxpayer are exempt under Va. Code §58.1-608(3)(b); (3) the royalty fees are not subject to the tax; and (4) transportation charges are exempt of the tax pursuant to Va. Code §58.1-608(5)(c).
You contest the entire assessment based on the above.
DETERMINATION
I will address the issues presented in your letter as grouped below:
Publications/Printing: A recent Ruling of the Tax Commissioner, P.D. 91-29 (3/11/91), copy enclosed, addresses the applicability of the sales and use tax to "shoppers" magazines advertising homes for sale. It explains that such magazines do not qualify for the publication exemption provided in Va. Code §58.1-608(6)(c), nor do they qualify for the "catalog" exemption in Va. Code §58.1-608(6)(d). Accordingly, the Taxpayer is required to collect and remit to the department sales tax on its sales of magazines to its franchisees.
Additionally, the exemption in Va. Code §58.1-608(3)(b)(v) is for equipment, printing or supplies used directly to produce a publication described in subdivision 6 c whether it is ultimately sold at retail or for resale or distribution at no cost. Thus, since the magazines in the instant case do not qualify for the publication exemption, the printing exemption would not apply.
Royalty Fees and Transportation Charges: As the enclosed ruling letter points out, royalty charges, if only for the intangible right to use the franchiser's name, are not subject to the tax if separately stated on the sales invoice. However, if such charges are based on the number of pages printed, they would be subject to the tax since tangible personal property is provided in connection with such royalties. It further explains that transportation or delivery charges are nontaxable if separately stated on the invoice. Handling charges, however are subject to the tax. Thus, if the Taxpayer bills its franchisees a lump-sum amount for the above, the total charge is subject to the tax.
Nexus: Va. Code §58.1-612 provides that a dealer has sufficient activity within the state to require registration for sales tax purposes if he:
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- 1. Maintains or has within this State, directly or through an agent or subsidiary, an office, warehouse, or place of business of any nature;
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- 2. Solicits business in this State by employees, independent contractors, agents or other representatives;
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- 3. Advertises in newspapers or other periodicals printed and published within this State, on billboards or posters located in this State, or through materials distributed in this State by means other than the United States mail; or
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- 4. Makes regular deliveries of tangible personal property within this State by means other than common carrier....
Thus, if a taxpayer meets one or more of the nexus requirements as set forth above, it must register as a dealer for collection and payment of the tax. If it does not meet any of the nexus requirements, it may, as a service to its customers, voluntarily register as a dealer for collection and remittance of the tax.
Based on the information provided, I find that the Taxpayer does meet one of the "nexus" requirements and thus is required to register for collection of the sales tax. You state in your letter that the Taxpayer's franchisees are independent contractors of the Taxpayer who seek advertisers who wish to advertise in the magazine distributed by the franchisees but printed by the franchiser. In addition, the Taxpayer has another independent contractor in Virginia who performs various activities, including recruiting additional persons or corporations to become franchisees, assisting new franchisees in starting up their operations, responding to questions from franchisees on magazine preparation and distribution and resolving problems, and assisting in operating a franchise in the event of an emergency.
While you stress that the primary function of the independent contractor is to locate additional franchisees for the Taxpayer and that the other activities are performed irregularly and occasionally, the additional franchisees secured by the independent contractor result in additional business for the Taxpayer. Thus, sufficient nexus has been established to require that the Taxpayer be registered to collect the Virginia tax.
Based on the foregoing, I find no basis for revision of the assessment unless the Taxpayer can provide documentation revealing that transportation charges were separately stated on its sales invoices and that the royalty fees charged were based solely on the use of its name and were also separately stated on the invoices. Upon receipt of such information, if within 45 days of the date of this letter, I will revise the assessment accordingly. Additionally, the assessment may be revised upon a showing of proof by the Taxpayer of use tax paid by its franchisees on sales included in the assessment.
Such documentation should be sent to the department's Office Services Division, Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282. If the documentation is not received within the specified time period, the assessment, with interest accrued through the date of your original letter, shall be due and payable.
If you have any questions regarding this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner