Did a Virginia advertising agency owe tax on photo-production labor and brochures printed for a client campaign?

Subject

Advertising agency taxed on photo production and printing

Plain-English summary

Virginia upheld tax on both the agency's photo-production invoice and its purchase of printed campaign brochures.

For the photography transaction, the vendor separately listed photo retouching, computer time, and the finished image or print. Separate invoicing did not make the labor exempt. The true object was the produced tangible property, and the services were directly connected with making it, so the entire charge was taxable.

For the brochures, Virginia's advertising regulation treated the agency as the user and consumer of printed materials bought for its advertising business. That remained true even though the brochures were for a specific client campaign and would be mailed to the general public. The printer itself did not provide advertising services as defined by the statute.

What this means for you

• Separately stated creative or production labor can remain taxable when the buyer's true object is finished tangible property.
• Advertising agencies were treated as consumers of brochures, flyers, direct-mail pieces, and similar printed materials used in campaigns.
• Intended public or out-of-state distribution did not change the printing result under the cited regulation.
• The full audit assessment was upheld.

Common questions

Was photo-retouching labor exempt?

No. It was part of producing the image or print that the agency wanted to obtain.

Did separate labor lines on the invoice help?

No. The true-object rule applied to the entire charge.

Were brochures tax-free because they were mailed to the public?

No. The agency was the user and consumer of printed campaign materials.

Was the printer treated as an advertising business?

No. The ruling says the printer did not provide statutory advertising.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-40 and 10-210-4040.
• P.D. 93-87 (Mar. 29, 1993); P.D. 93-113 (Apr. 29, 1993).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-185

Original ruling text

November 21, 2007

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period February 2002 through December 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is an advertising agency. The Taxpayer raises two issues in which it maintains that it was incorrectly assessed tax on purchases in the audit.

In its first issue, the Taxpayer hires a vendor for the purpose of purchasing tangible personal property of a photographic nature. The invoice given to the Taxpayer by the vendor includes separately stated charges for labor associated with the production of the tangible personal property and charges for the finished product. The Taxpayer maintains that it should not have been assessed tax on charges for labor, contending that these charges are for exempt services.

In its second issue, the Taxpayer utilizes a printer to print brochures for a specific advertising campaign that will ultimately be mailed to the general public. The Taxpayer maintains that it should not have been assessed tax on charges for printing performed by a printer.

DETERMINATION

Issue 1

Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 A states:

Charges for services generally are exempt from the retail sales and use tax. However, services provided in connection with the sale of tangible personal property are taxable. Transactions involving both the sale of tangible personal property and the provision of services generally are either taxable or exempt on the full amount charged, regardless or whether the charges for the service and property components are separately stated.

Title 23 VAC 10-210-4040 B provides that charges made for "[a]ny services included in connection with the sale of tangible personal property" are taxable.

Pursuant to Title 23 VAC 10-210-4040 D, the true object of a transaction must be examined in order to determine whether a transaction that involves the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The regulation further provides that:

If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.

In Public Document (P.D.) 93-87 (3/29/93), the taxpayer was a full service video production company that specialized in the production of videotapes. The video production involved engineering and technical consulting, professional narration, music dubbing, camera operation and a host of other services. Pursuant to Title 23 VAC 10-210-4040 (former Virginia Regulation 630-10-97.1), the Tax Commissioner determined that although the production of the tapes included personal services, the true object of the transaction was for the sale of the videotapes. The Tax Commissioner further stated that the images and information contained on the tapes would not be useful without possessing the actual tape.

In this instance, the labor at issue (photo retouching and computer time) is provided directly in connection with the purchase of the photo image or print. Pursuant to P.D. 93-87, although the transaction includes services, the true object of the transaction is to secure the tangible personal property produced, the photo image or print. Without the photo image or print, there would be no need for the services provided. Pursuant to Title 23 VAC 10-210-4040, the entire charge for the transaction is taxable, despite the fact that the charges for the labor and property are separately stated on the invoice. Accordingly, the tax was correctly assessed in the audit.

Issue 2

Title 23 VAC 10-210-40 B provides that:

Advertising businesses are engaged in providing professional services and are the users and consumers of all tangible personal property purchased for use in such businesses. Therefore, the tax applies to all purchases by an advertising business including, without limitation, the following items: . . . [p]rinting , including direct mail items, non-customized or stock mailing lists, handbills, brochures, flyers, bumper stickers, posters and similar printed materials whether or nor for use in the development of a specific advertising campaign, and whether or not any of such materials are intended for distribution out of state. [Emphasis added.]

In P.D. 93-113 (4/29/93), the taxpayer was an advertising agency that purchased brochures on behalf of its client, a local government. The taxpayer requested a ruling regarding the application of the retail sales and use tax on these purchases. Pursuant to Va. Code § 58.1-609.6(6) (former Va. Code § 608(A)(6)(e)), Va. Code § 58.1-602, and Title 23 VAC 10-210-40 (former Virginia Regulation 630-10-3), the Tax Commissioner ruled that the taxpayer was the user and consumer of the purchased materials because, as an advertising agency, it purchased the printed materials for use in an advertising project for its client.

Similar to the taxpayer in P.D. 93-113, the Taxpayer is an advertising business that purchased brochures on behalf of its client for a specific advertising campaign. As such, the Taxpayer is deemed the user and consumer of the printed materials purchased from its printer. In this instance, the Taxpayer's printer cannot be considered an advertising business because the printer did not provide advertising as defined in Va. Code § 58.1-602. Pursuant to Title 23 VAC 10-210-40, the printing at issue is subject to the retail sales and use tax. Accordingly, the tax was correctly assessed in the audit.

CONCLUSION

Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The regulations and public document cited 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 determination, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-636869749P