Was a customized marketing package taxable because it included surveys, campaigns, website work, DVDs, CDs, booklets, and a DVD player?

Subject

Nontaxable service customized marketing strategy package for services, shipping and handling only.

Plain-English summary

Virginia removed the marketing package from the audit because its true object was a customized service. The package included a membership survey, internal and external campaigns, website development and hosting, DVDs, CDs, booklets, and a DVD player.

The contract showed the vendor's central work was developing a tailored strategy for the athletic facility to attract and retain members. The tangible items were included but were not critical to what the customer sought.

Virginia therefore treated the transaction as a nontaxable service with inconsequential property. Because the facility had paid the assessment, it received a refund plus refund interest after audit adjustment.

What this means for you

• The presence of physical deliverables does not automatically make a service package taxable.
• Contract language should identify the customer's primary objective and the role of each deliverable.
• Property that is critical to the transaction can change the true-object result.

Citations and references

• Va. Code § 58.1-633 A, as cited in the ruling.
• 23 VAC 10-210-4040 D.
• P.D. 95-300.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-23

Original ruling text

February 20, 2013

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period February 2008 through January 2011. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, who operates an athletic facility, was assessed use tax on its purchase of a marketing consulting package. Based on the initial sales invoice reviewed during the audit, the price of the package includes both consulting services and tangible personal property. The Taxpayer presented a second invoice to support its contention that the price of the marketing package was for services and shipping and handling only.

DETERMINATION

Virginia Code § 58.1-633 A provides an exemption from the retail sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...." Title 23 of the Virginia Administrative Code 10-210-4040 provides that charges for services are generally exempt from the tax except when provided in connection with the sale of tangible personal property. Section D of the regulation states in pertinent part:

In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. 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 95-300 (11/21/95), the taxpayer purchased marketing services that included the provision of tangible personal property. The Tax Commissioner ruled the true object of the Taxpayer’s purchase was exempt marketing services, and the vendor was liable for the tax on the tangible personal property provided.

In this case, the Taxpayer was assessed use tax for the purchase of a marketing consulting package. Based on the initial invoice reviewed during the audit, as well as the contract presented during the appeal, the marketing package includes a membership survey, external and internal marketing campaigns, web-site development and hosting, DVDs, CDs, booklets, and a DVD player.

Although tangible personal property is included in the purchase price of the package, it is not critical to the transaction. Based on the contract’s language, the package develops a customized marketing strategy that enables the Taxpayer to attract and retain new members. Based on the information provided, the true object of the Taxpayer’s purchase is to obtain custom marketing services, not tangible personal property. Therefore, the Taxpayer purchased a nontaxable service from its vendor and is not subject to the sales and use tax on the charge for such service.

Based on the foregoing, I will agree to remove the contested purchase from the audit. The audit will be returned to the appropriate field audit staff to make the necessary adjustments to the audit within 30 days of the date of this letter. Since the Taxpayer has paid the assessment in full, a refund, including refund interest, will be issued to the Taxpayer after the audit adjustments have been made.

The Code of Virginia section, regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5038289927.M