Was a custom digital film exempt from Virginia use tax when an amusement facility bought it for an attraction?

Plain-English summary

Virginia held that the custom digital film was exempt because the amusement facility acquired it for commercial exhibition and incorporated it into an attraction. The statutory exemption covered audiovisual works acquired for licensing, distribution, broadcasting, commercial exhibition, reproduction, or incorporation into another such work.

The film was custom-created and downloaded by the vendor onto a portable hard drive supplied through another vendor. The hard drive was shipped to the taxpayer, which downloaded the film and used it in a new attraction.

The taxpayer had already reported and paid use tax. The Department directed its audit staff to verify that payment before processing the refund, and gave the taxpayer 30 days after contact to provide the documentation.

What this means for you

• The deciding fact was the film's acquisition for commercial exhibition in the amusement attraction.
• Physical delivery on a portable hard drive did not defeat the specific audiovisual-work exemption applied here.
• A legal entitlement to a refund still required proof that the tax had been paid.
• The ruling is fact-specific and historical; verify the current statute for other digital-content transactions.

Common questions

Did the ruling treat all digital films as exempt?

No. It applied the exemption to this film because it was acquired and used for commercial exhibition.

Did delivery on a hard drive make the film taxable?

Not under the specific exemption applied in this ruling.

Was the refund automatic?

No. The taxpayer had to document that the use tax had been remitted.

Citations and references

• Va. Code § 58.1-609.6(6)(a)(i).

Subject

Digital film was purchased by the Taxpayer for commercial exhibition

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-18

Original ruling text

March 27, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek a refund of use tax paid on the purchase of electronic digital film. I apologize for the delay in responding to your request.

FACTS

The Taxpayer purchased digital film from Vendor A in August 2001. The Taxpayer reported the purchase on its August sales tax return and remitted use tax. The Taxpayer contracted with Vendor A for the creation of a custom digital film. Vendor A developed a storyline for the film, including characters, created images for the storyline, and used the images to create a digital custom film. Vendor B, hired by the Taxpayer to obtain the film from Vendor A, delivered a portable computer hard drive to Vendor A. Vendor A downloaded the film onto the portable hard drive and then shipped it directly to the Taxpayer. Vendor A never provided any videotapes, data tapes, DVDs, disks or similar media to the Taxpayer. The Taxpayer downloaded the digital film to its computer and incorporated it into a new attraction at its amusement facility.

In 2004, the Taxpayer filed a protective claim for refund with the Department regarding the purchase of the digital film and the use tax remitted. During this same time period, an audit was being performed on the Taxpayer's records. The Taxpayer was instructed by a Department representative to provide the refund information to the audit staff for review in conjunction with the audit. Following that review, the audit staff denied the Taxpayer's refund request. The Taxpayer maintains that the purchase of the digital film is exempt pursuant to Va. Code § 58.1-609.6 6 a (i), and requests a refund of the use tax remitted.

DETERMINATION

Virginia Code § 58.1-609.6 6 a (i) provides, in pertinent part, that the retail sales and use tax does not apply to:

The lease, rental, license, sale, other transfer, or use of any audio or video tape, film or other audiovisual work where the transferee or user acquires or has acquired the work for the purpose of licensing, distributing, broadcasting, commercially exhibiting or reproducing the work or using or incorporating the work into another such work.

The Taxpayer purchased the digital film for use at its amusement facility. Once received by the Taxpayer, the digital film was incorporated into an attraction at the facility. Based on the information provided, the digital film was purchased by the Taxpayer for commercial exhibition, as described in the statute. Accordingly, the exemption found in Va. Code § 58.1-609.6 6 applies to the purchase of the digital film.

The Department's audit staff will contact the Taxpayer to obtain the documentation verifying that the tax associated with the purchase of the digital film has been remitted to the Department. The Taxpayer will have 30 days from the date of contact with the audit staff to provide such documentation.

The Code of Virginia section cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/56138P