Which marketing-firm audit items did Virginia remove, and could creative pass-through costs or appeal interest also be abated?

Plain-English summary

Virginia reduced the marketing firm's audit only where its records supported a specific adjustment. The Department removed several items shown to have been mailed outside Virginia, plus business cards shown as shipped to the Washington, D.C. customer.

Other purchases stayed taxable because purchase orders submitted at different stages showed conflicting delivery information. The taxpayer therefore did not carry its burden to prove those exemptions.

For contested sales, a mailing-count document showed that 35% of the 2006 mailings went outside Virginia. Virginia used that percentage to reduce the contested sales measure for the audit period.

Creative and design costs from another advertising agency remained in the taxable sales price when the taxpayer passed them to its customer with a markup as part of a flat fee. Virginia also declined to waive interest accrued during the appeal and reconsideration or to abate half the remaining liability. The revised audit would produce a partial refund or reduce the unpaid assessment, depending on the taxpayer's payment status.

Common questions

Q: Was out-of-state delivery enough without consistent records?
A: No. Virginia kept items in the audit when the taxpayer's purchase orders conflicted about delivery.

Q: Could separately incurred creative costs be deducted from sales price?
A: No. On these facts, they were service costs or business expenses included in what the customer paid.

Citations and references

• Va. Code §§ 58.1-205, 58.1-602, 58.1-609.6(4), 58.1-1812, and 58.1-1835.
• Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973).
• Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972).

Subject

Management services for clients for media advertising and non-media campaigns.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-81

Original ruling text

May 11, 2012

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 request a reconsideration of the prior determination issued to the Taxpayer. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a strategic marketing firm that functions primarily as the marketing department for its clients. The Taxpayer provides strategy, creative and production management services for its clients for media advertising and non-media campaigns. The Department audited the Taxpayer for the period November 2002 through October 2008 and assessed additional tax and interest. The Taxpayer filed an appeal contesting certain portions of the audit assessment. The Taxpayer also presented an offer in compromise based on doubtful liability. The Taxpayer requested a waiver of one-half of the interest and all penalties assessed. In support of its offer in compromise, the Taxpayer states it received incorrect information from the Department regarding the application of the retail sales and use tax on sales made in connection with its marketing business.

A determination letter was issued to the Taxpayer on March 17, 2011. The Taxpayer's offer in compromise was denied because the Taxpayer did not demonstrate that it received written guidance from the Department as required by Va. Code § 58.1-1835. Additionally, the Taxpayer was denied most of the revisions requested because it did not provide the documentation necessary to support the issues being contested. Some revisions were authorized by the determination letter, and the revisions were made to the audit by the audit staff.

After receiving the determination letter, the Taxpayer filed a reconsideration indicating that it was providing documentation and additional explanation to support relief from the tax assessed. The Taxpayer also explained why additional relief should be granted based upon doubtful liability. The Taxpayer filed a subsequent letter clarifying facts regarding its offer in compromise based on doubtful liability. The issues presented will be addressed below.

DETERMINATION

Contested Purchases

The Taxpayer states that the tangible personal property at issue was shipped outside the state to its client in Washington, D.C. The Taxpayer maintains that the transactions are exempt of the tax pursuant to Va. Code § 58.1-609.6 4 because the property is printed materials stored in Virginia for 12 months or less. The Taxpayer states the invoices to this customer did not include "ship to" addresses because the invoices may have included items from various purchase orders, some of which were for direct shipment to the client in Washington, D.C., and some of which were for delivery to the U.S. Post Office for mailing to the client's customers and prospective customers.

Line Items 2, 3, 4, and 5

Based upon a review of the documentation provided during the audit, the appeal and the request for reconsideration, I find some discrepancies in the information provided. Specifically, the purchase orders provided with the reconsideration indicate different delivery information than the purchase orders reviewed during the audit. As a result of these discrepancies, I am unable to determine which of the documents provided is a correct representation of the transactions at issue. "Statutes granting tax exemptions are construed strictly against the taxpayer." Commonwealth v. Community Motor Bus Co., Inc. , 214 Va. 155, 198 S.E.2d 619 (1973). "Exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1972). Accordingly, these line items will remain in the audit.

Line Items 6, 7, 8, 11, 12 and 13

Based upon a review of the documentation presented, the tangible personal property at issue was mailed to the Taxpayer's customer outside of Virginia. Accordingly, these line items will be removed from the audit.

Non-Contested Purchases

Line Item 26

The tangible personal property at issue in this instance is business cards purchased by the Taxpayer for its customer. The Taxpayer maintains that the business cards were shipped directly to the Taxpayer's customer in Washington, D.C. The Taxpayer also states that the business cards were not part of any media campaign conducted by the Taxpayer or the customer. The Taxpayer maintains that the purchase of the business cards is exempt for resale to its customer.

The purchase order provided with the Taxpayer's request for reconsideration indicates that the business cards were shipped to the Taxpayer's customer in Washington, D.C. Accordingly, this line item will be removed from the audit.

Line Item 27

Based upon a review of the documentation provided during the audit, the appeal and the request for reconsideration, I find some discrepancies in the information provided. Specifically, the purchase orders provided with the reconsideration indicates different delivery information than the purchase orders reviewed during the audit. As a result of these discrepancies, I am unable to determine which of the documents provided is a correct representation of the transaction at issue. "Statutes granting tax exemptions are construed strictly against the taxpayer." Commonwealth v. Community Motor Bus Co., Inc. , 214 Va. 155, 198 S.E.2d 619 (1973). "Exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1972). Accordingly, this line item will remain in the audit.

Contested Sales

The Taxpayer contends the contested sales measure should be reduced to reflect the percentage of sales in which the property remained in Virginia. The Taxpayer provides a Mailing Counts document that summarizes the mailing counts by month for calendar year 2006. The Taxpayer requests that the total contested sales measure be reduced by 35 percent, which represents the non-Virginia portion of the mailings at issue.

Based upon the information provided, the contested sales measure will be reduced by 35 percent for the purpose of the audit period at issue.

Advertising Campaign Charges

The Taxpayer contracted with an advertising agency to design and prepare documents for the Taxpayer's customer. The Taxpayer states that the fees associated with this transaction were passed on to its customer, with a markup, as part of the flat fee charged to its customer. The Taxpayer requests that these costs be removed from the assessment as they were strictly for creative and design costs.

Virginia Code § 58.1-602 defines sales price, in pertinent part, as:

The total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

The charges that the Taxpayer would like to have removed are deemed service costs as considered in the Va. Code § 58.1-602 definition of sales price. These charges are pass-through charges or business expenses for the Taxpayer. Accordingly, these charges cannot be removed from the sales price of the items charged to the Taxpayer's customer.

Abatement of Interest and One-Half of Remaining Liability

The Taxpayer submitted a letter dated May 9, 2011 to provide clarification to statements made in its request for reconsideration. In that letter, the Taxpayer requests an abatement of the interest accrued while awaiting the determination letter issued in response to the Taxpayer's appeal. The Taxpayer also requests an abatement of the interest accrued while awaiting the response to its request for reconsideration, and an abatement of one-half of the remaining liability, after adjustments are made in response to its request for reconsideration.

Interest Abatement

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this instance, the Taxpayer had use of money that was properly due the Commonwealth. While Taxpayers are not required to remit payment of a contested assessment prior to submitting an appeal, Taxpayers have the option to remit such payment to avoid the accrual of interest while an appeal is being processed by the Department. The Taxpayer did not exercise this option. Accordingly, I find no basis to waive the interest accrued during the appeal and reconsideration processes.

Abatement of One-Half of the Remaining Liability

Audits are conducted by the Department to determine taxpayers' compliance with the tax laws enacted by the Commonwealth. Pursuant to Va. Code § 58.1-205, "Any assessment of a tax by the Department shall be deemed prima facie correct." Taxpayers have the burden of proving that an assessment of tax by the Department is incorrect. Outside of the adjustments required by this determination, the Taxpayer has not proven that the remaining portion of the assessment is incorrect, requiring an abatement of one-half of such liability. Accordingly, the request for abatement of one-half of the remaining liability is denied.

CONCLUSION

The audit will be returned to the audit staff and revised in accordance with this determination. Because the non-contested bill has been paid in full, the Taxpayer will receive a partial refund, plus refund interest accrued to date, based upon the revisions made to the audit.

The Taxpayer has established a payment plan with the Department with respect to the contested bill. If an outstanding liability remains, the Taxpayer may continue to make payments based upon the payment plan previously established, or the Taxpayer may request that the payment plan be revised based upon this determination and the revised assessment. If the outstanding liability has been paid in full, the Taxpayer will receive a partial refund, plus refund interest accrued to date. If you have any questions concerning the payment plan, you may contact * at ***.

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 web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4760008430.P