Did a Virginia advertising franchise owe tax on an in-state printer's full charge for printing, inserting, and mailing direct-mail advertisements?

Plain-English summary

The advertiser's service to its customers was exempt, but its full purchase from the Virginia printer was taxable. The franchise created advertising fliers, and its Virginia parent printed them, inserted them into envelopes, and mailed them to Virginia customers.

Virginia treated the franchise as an advertising business providing exempt professional media-advertising services to its customers. As the provider, however, it was the taxable user and consumer of the printed materials used to perform those services.

Because an in-state printer supplied the direct-mail work, tax applied to the complete mailing-services charge, including paper, printing, insertion, and mailing. If the parent did not collect the tax, the franchise had to accrue and remit it.

The exemption for separately stated installation, application, remodeling, or repair labor did not apply. That specific rule explained why separately stated automobile-repair labor could be exempt, but it did not exempt other services bundled with a taxable sale of tangible property.

Common questions

Q: Was the franchise's charge to its advertising customer taxable?
A: No. The ruling treated that transaction as exempt professional advertising services.

Q: Could the franchise exclude insertion and mailing from the printer's taxable charge?
A: No. With the Virginia printer, the full direct-mail charge was taxable.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.6(5).
• Va. Code § 58.1-609.5(2).
• 23 VAC 10-210-40 and 23 VAC 10-210-41(B).
• Virginia Public Document 93-180 (August 9, 2003, as cited in the ruling).

Subject

Labor and service charges taxable when made in connection with the sale of tangible personal property

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-116

Original ruling text

July 19, 2012

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you (the "Taxpayer") request a ruling regarding the application of the retail sales and use tax to mailing services.

FACTS

The Taxpayer operates a franchise. The Taxpayer will approach potential customers for purposes of selling advertising. Once a sale is made, the Taxpayer develops a computer generated advertisement flier and uploads the flier to the franchisor's (the "Parent") printing facility in Virginia. The Parent, in turn, prints and inserts the fliers into envelopes and mails the envelopes to the Taxpayer's Virginia customers. The Parent charges the Taxpayer the sales tax on the entire mailing charge, which includes charges for the paper, printing and insertion of the fliers in envelopes. The Taxpayer disagrees with the application of the tax to the insertion fees and mailing service charges and contends only the paper and printing charges are subject to the tax. The Taxpayer questions if it can pay the tax on such charges rather than have the Parent apply the tax on the entire mailing services charge.

RULING

Virginia Code § 58.1-609.6 5 provides that the retail sales and use tax shall not apply to "[a]dvertising as defined in § 58.1-602." Virginia Code § 58.1-602 defines advertising as:

The planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting and other media, including, without limitation, the providing of concept, writing, graphic design, mechanical art, photography and production supervision. Any person providing advertising as defined herein shall be deemed to be the user or consumer of all tangible personal property purchased for use in such advertising.

Title 23 of the Virginia Administrative Code (VAC) 10-210-40 defines the term "media" to include "newspapers, magazines, billboards, direct mail, radio, television, and other modes of communication." Furthermore, Title 23 VAC 10-210-41 B provides, in pertinent part:

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 . . . printing, including direct mail items, non-­customized or stock mailing lists, handbills, brochures, flyers, bumper stickers, posters and similar printed materials whether or not 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 ....

In Public Document (P.D.) 93-180 (8/9/03), the taxpayer was a Maryland based company that mailed printed advertising and promotional sales materials on behalf of its customers. The taxpayer had plans to locate an agent in Virginia to solicit orders for these materials, and requested a ruling regarding the tax implications. The taxpayer indicated that the materials would be printed and mailed by a contractor located outside Virginia. Pursuant to Title 23 VAC 10-210-41 (formerly Virginia Regulation 630-10-3), the Tax Commissioner determined that if an out-of-state printer is used by a Virginia advertising business, only those mailing service charges for materials shipped into Virginia by the printer are subject to the tax. Of course, if an in-state printer is used by a Virginia advertising business, the mailing charges inclusive of charges for materials shipped to Virginia customers are also taxable.

In this case, the Taxpayer is considered an advertising business and is providing media advertising services. Therefore, the Taxpayer and other Virginia franchisees are the taxable users or consumers of all tangible personal property used in such advertising.

Pursuant to Va. Code § 58.1-609.6 5, § 58.1-602 and Title 23 VAC 10-210-41 B, the transaction between the Taxpayer and other franchisees (advertising businesses) and its Virginia customers is exempt because the contract is for professional services in the development and placement of advertising in the media. The transaction between the Taxpayer and the printer is taxable because the Taxpayer is an advertising business and the taxable user and consumer of all tangible personal property purchased to provide media advertising services. In accordance with Title 23 VAC 10-210-41 B and P.D. 93-180, the retail sales and use tax applies to the Taxpayer's purchases of printing, including mailing services. Accordingly, the Parent providing the printing is correct in applying the tax to the mailing services inclusive of the charges for printing and insertion of the materials. If the Parent does not charge the tax on the mailing services, the Taxpayer and the other Virginia franchisees must accrue and remit the tax on the mailing service charges.

The Taxpayer points out that the tax is not applied to labor or service charges when an automobile is repaired and questions why one service is not taxable and another similar service is taxable.

"Sales price" is defined in Va. Code § 58.1-602 as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . without any deduction [for] the cost of the property sold, the materials used, labor or service costs, losses or any other expenses whatsoever." [Emphasis added]. Virginia Code § 58.1-609.5 2 provides a specific exemption from the tax for separately stated charges for "labor or services rendered in installing, applying, remodeling or repairing property sold." As such, automobile repair labor is exempt from the tax, when separately stated, in accordance with the statute. Although these specified labor and service charges are exempt from the tax (when separately stated), other labor and service charges remain taxable when made in connection with the sale of tangible personal property, which is the case here. Accordingly, Va. Code § 58.1-609.5 2 does not apply to the service charges at issue.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result. The Code of Virginia sections, regulations and public document cited are available on-line at ww.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this matter, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4664179100.Q