Tax Type
Retail Sales and Use Tax
Description
Advertising; Newspapers
Topic
Taxability of Persons and Transactions
Date Issued
03-24-1995
March 24, 1995
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear******
This will respond to your letter in which you seek correction of a sales and use tax assessment to your company, ***********(the "Taxpayer"), for the period September 1989 through August 1992.
FACTS
The Taxpayer, a newspaper publisher, contests two issues held taxable in the audit assessment. The first issue involves one-page advertisements printed by the print shop (rather than the normal newspaper printing facility of the Taxpayer) for insertion into the newspaper. The advertisements are not used for any other means of advertising such as direct mail. The auditor, treating the Taxpayer as an advertising business, held taxable the paper used in producing the inserts. The Taxpayer maintains that the inserts are an integral part of the newspaper, and accordingly the materials used to produce such are nontaxable.
The second issue involves the Taxpayer's subscription to a service which provides on a monthly basis portfolios of drawings and illustrations. Some, but not all of the illustrations are used in the production of advertising in the newspaper. The auditor prorated the tax on the charge for the service based upon the proportion of illustrations used in the actual production of the newspaper (exempt) to those which were not used (taxable). The Taxpayer contests the tax as it maintains that the sole purpose for subscribing to the service is to use the illustrations in the production of advertising in the newspaper.
DETERMINATION
I will address each of the contested issues individually below.
Special Inserts: You assert that most of the special inserts are created by outside sources and the layout is provided to the Taxpayer for printing and insertion in the paper. However, it is my understanding that the Taxpayer in some instances actually provides creative concept, design, or other artistic or creative services to its customers in connection with its sales of advertising inserts. Accordingly, the Taxpayer, in providing creative concept, design, etc., or contracting with a third party on behalf of a customer to do so, in addition to the printing of the inserts, is acting as an advertising business. [See P.D. 88-257 (9116188), copy enclosed] As an advertising business, it is subject to the tax on its purchases of tangible personal property used in producing the inserts. However, it may purchase concept, writing, graphic design, etc. from another advertising business exempt from the tax provided a properly completed exemption certificate, Form ST-10A, is furnished to the vendor indicating that the item will be used in conjunction with an advertising campaign. [See VR 630-10-3, the department's regulation relating to advertising businesses, copy enclosed. You should note, however, that we are in the process of revising this regulation. Thus, also enclosed is a copy of the most recent draft of the regulation.]
In those instances in which the Taxpayer merely reproduces inserts from layout provided to it (where it provides no creative services), it is not acting as an advertiser, but as a printer and may purchase paper for such use exempt from the tax under a resale exemption certificate. To verify the extent to which the paper was used in each activity, I will have the auditor revisit the Taxpayer to review its records. Based upon this review, the audit assessment may be adjusted. Furthermore, since this was a new audit issue, I will agree to waive the penalties assessed with respect to this issue.
You should note that legislation (Senate Bill 648) was passed by the 1995 General Assembly and is awaiting the Governor's signature which will exempt from the sales and use tax, effective July 1, 1995 through June 30, 1997, sales of printing to a Virginia advertising agency for distribution out-of-state, and newspaper supplements when purchased by advertising businesses for placement in instate or out-of-state publications.
Portfolio containing graphics and artwork: It is my understanding that based upon the manufacturing exemption provided in Code of Virginia §58.1-609.2(v), the tax was assessed only on that portion of the portfolio which was not used directly in the production of the newspaper. However, since the Taxpayer is actually an advertiser with respect to the advertisements placed in the newspaper and the "We Print" inserts, it is required to pay the tax on all purchases of tangible personal property used in producing the advertisements. [See VR 630-1 0-3(B)(3) which specifically addresses the tax status of purchases by an advertising business of concept, photography, etc, not made pursuant to the development of a specific advertising campaign.]
As such, this portion of the audit will not be adjusted. However, in the future, the Taxpayer is required to pay the tax on the entire cost of the portfolio.
Accordingly, an auditor will be contacting the Taxpayer shortly regarding the insert issue, and upon review and possible revision as a result thereof, a revised Notice of Assessment will be mailed to the Taxpayer.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/7754H
Rulings of the Tax Commissioner