Did a third-party yearbook ordering service collect Virginia sales tax when acting for public or nonprofit schools?

Subject

Yearbook sales through school agents followed each school's documented exemption status

Plain-English summary

Virginia treated the third-party yearbook service as the school's sales agent, so tax depended on the school's own exemption status and documentation. The manufacturer produced yearbooks for schools, while students could order through school-day, mail, website, call-center, credit-card, installment, or check programs.

Public schools purchased yearbooks for student distribution as exempt governmental entities. A public school had to give the manufacturer Form ST-12. When it enrolled in an optional program, the third party acted for the school, credited collections to the school's account, and did not collect sales tax.

Private or parochial nonprofit schools needed a valid Department exemption letter. With that documentation, their manufacturer purchases and agent sales also remained exempt.

A school or organization without exemption documentation owed a different result. If registered to collect Virginia sales tax, it could give the manufacturer Form ST-10 for resale. Its later yearbook sales—including those made through the third-party agent—were retail sales on which the school or organization had to report and remit tax.

What this means for you

• The school's exemption status controlled agent-handled yearbook sales.
• Public schools needed Form ST-12.
• Qualifying nonprofit schools needed the Department's exemption letter.
• Nonexempt registered schools could buy for resale but had to tax student sales.

Common questions

Did the third-party ordering service create a separate taxable sale?

Not for an exempt school. It acted as the school's agent under the program documents.

What did a public school provide?

Form ST-12.

What if a nonprofit school lacked an exemption letter?

Its sales were taxable unless it used a valid resale process and collected tax from students.

Citations and references

• Va. Code §§ 58.1-609.1(4), 58.1-609.4(8), and 58.1-609.11.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-1

Original ruling text

January 13, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to school yearbooks ordered through a third-party sales agency. I apologize for the delay in responding to your letter.

FACTS

* (the "Taxpayer"), an out-of state manufacturer, produces and sells school yearbooks to public schools. The customer schools are responsible for the sale of school yearbooks directly to students at prices determined by the schools. For an additional fee, the schools may contract with the Taxpayer for three optional selling programs that allow for alternative payment methods. The three programs allow for orders to be taken on a school order day, by home order mailing and by a website that lists a call center for taking orders. In the latter instance, the Taxpayer has contracted

with a third party to develop and service the website and call center for the school yearbook sales. Purchasers ordering through the optional programs may be billed for purchases at a later date or they may pay by credit card, installment payments or by check. The Taxpayer states that all payments received by the third party are credited to the school's account on the Taxpayer's books. Additionally, if payments received exceed the total amount of the Taxpayer's contract with the schools, the schools would receive a refund of the overage.

The Taxpayer questions if the third party is required to include the tax on the yearbook price quoted to the purchaser. The Taxpayer also ask if the response would be the same if, instead of a public school, the schools were nonprofit private or parochial schools or other nonprofit organizations.

RULING

In recent years there have been changes related to the exemptions provided to public schools, nonprofit schools and nonprofit organizations. In addition to such changes, there have been changes to the documentation required to allow exemptions for the purchase of tangible personal property. I will address these changes below.

Exemption Process, Nonprofit Schools and Organizations

Prior to July 1, 2004, the Code of Virginia set out specific exemption statutes for certain nonprofit organizations, including schools and churches. Effective July 1, 2004, the Virginia General Assembly implemented a new process by which nonprofit organizations obtain sales and use tax exemptions.

Virginia Code § 58.1-609.11 A provides that any nonprofit organization that held a valid exemption certificate on June 30, 2003, would retain its exemption. The exemption for tangible personal property purchased for use or consumption, or sale at retail by a nonprofit elementary or secondary school or group associated with a nonprofit elementary or secondary school granted under Va. Code § 58.1-609.4 8 was grandfathered under Va. Code § 58.1-609.11 until expiration on July 1, 2007. Pursuant to Va. Code § 58.1-609.11 B, the Department will issue a certificate of exemption letter with an exemption number to a nonprofit organization that qualifies for the exemption under Va. Code § 58.1-609.11 C.

Public Schools

The public school as an exempt entity of the Commonwealth of Virginia or its political subdivisions is purchasing the yearbooks for subsequent distribution to the students and is exempt from taxation under Va. Code § 58.1-609.1 4. Accordingly, a Certificate of Exemption Form ST-12 must be presented to the Taxpayer in order for the purchase of the yearbooks to be exempt from the sales tax. If public schools have accepted the option to use third party selling programs, the sales by the third party would not be subject to the sales tax. The contracts or enrollment forms signed by the schools for each of the three optional programs state the following: "I understand that (Taxpayer) or other third parties will act on behalf of the school to bill students and collect funds from them in accordance with the pricing specified above . . . ." In essence, an agency relationship is established between the Taxpayer and the schools, in that the third party seller makes the sales of the yearbooks as an agent for the schools. The sales will bind the schools in a sales transaction whereby the schools are obligated to supply a tangible product for the funds received through the third party seller makes the sales of the yearbooks as an agent for the schools. The sales will bind the schools in a sales transaction whereby the schools are obligated to supply a tangible product for the funds received through the third party seller. Accordingly, the third party seller may sell yearbooks for the schools without collecting the retail sales tax.

Nonprofit Private or Parochial Schools

Nonprofit private or parochial schools that present a certificate of exemption letter issued by the Department may purchase tangible personal property exempt of the tax. Therefore, in order for the Taxpayer to make exempt sales to the nonprofit schools, such nonprofit schools must submit to the Taxpayer a copy of the exemption letter issued by the Department. If nonprofit schools have selected the option to enter into the selling programs handled by the third party, the sales by the third party would not be subject to the sale tax as previously stated with regard to public schools.

If the nonprofit school is unable to provide an exemption letter or is otherwise not exempt from the tax, the sale of the yearbooks to the schools or organizations would be subject to the sales tax. If, however, the nonexempt nonprofit schools or organizations are registered with the Department for the collection of the retail sales tax, they may present a resale certificate of exemption Form ST-10 to the Taxpayer. The presentation of such an exemption certificate represents that the nonexempt nonprofit schools or organizations will add the retail sales tax to their sales of the yearbooks and remit the tax to the Department.

With regard to the third party sales in the selling programs, the Department's response would change. Because the third party sales agency acting on behalf of the nonexempt nonprofit schools or organizations are making retail sales, such sales would be subject to the retail sales tax. The sales and the taxes collected on such sales would be reported to the Department by the nonexempt nonprofit schools or organizations.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have questions with regard to the response in this letter, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-948504660.Q