Are charges for advertising space in hospital display cases taxable, and who owes tax on the cases?

Subject

Taxpayer is not classified as a real property contractor

Plain-English summary

A concessionaire installed display cases and LCD boards in Virginia hospitals, then sold advertising space in them to local businesses. It kept ownership of the cases, maintained them, installed advertisers' materials, depreciated the cases, and removed them when its hospital contracts ended.

Virginia treated the company as selling an advertising-space service, not tangible personal property. The charges to local businesses therefore were not subject to retail sales tax.

The company was not a real-property contractor because the cases remained its property, were not permanently affixed, and were removed at the end of the term. As the service provider and consumer of the cases, it owed Virginia use tax on cases brought into Virginia if no like tax had been paid to another state.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040 E and 10-210-6030.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-92

Original ruling text

May 20, 2016

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which * (the “Taxpayer”) requests a ruling regarding the application of the Virginia retail sales and use tax to display advertising services provided by the Taxpayer to local businesses. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a concessionaire, is in the business of providing display advertising services at hospitals located in Virginia. As a part of its service, the Taxpayer will install display cases and LCD boards (hereinafter “Display Cases”) in Virginia hospitals and sell space in the Display Cases to local businesses for media advertising purposes. The Display Cases will be attached to the walls, floors, or ground throughout the hospital area. The Taxpayer will enter into five and ten year contracts with the hospital. The Taxpayer capitalizes the cost and depreciates the Display Cases over the term of the contract.

The Taxpayer retains ownership of the Display Cases and is responsible for maintaining and installing all advertising within the Display Cases. The Taxpayer does not produce any of the advertisements that are to be displayed. The local businesses provide the advertising material to be displayed in the Taxpayer's Display Cases. The local businesses maintain ownership of property installed in the Display Cases, and such property is returned to the local businesses at the end of the contract. The advertisements are generally either poster board or electronic graphics installed by the Taxpayer. The Taxpayer requests a ruling regarding whether the charges by the Taxpayer to the local businesses are subject to the Virginia retail sales tax, and whether the Taxpayer would be required to pay the Virginia use tax on the Display Cases brought into Virginia from out of state.

RULING

Based upon the information provided in your letter and subsequent e-mail, the Taxpayer does not operate as an advertising business; rather, it is in the business of leasing space in which advertising will appear, i.e. , the Display Cases. The Taxpayer is not classified as a real property contractor because the Display Cases installed by the Taxpayer remain the property of the Taxpayer, do not become permanently affixed to real property, and are removed at the completion of the contractual term with the hospitals.

Virginia Code § 58.1-609.5(1) provides a retail sales and use tax exemption for “professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...” In interpreting the exemption set forth in Va. Code § 58.1-609.5 1, Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 E provides that:

A service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services. If the supplier fails to collect the tax from the service provider, the provider shall remit use tax to the department as provided in 23 VAC 10-210-6030.

Title 23 VAC 10-210-6030 provides, in general, that:

The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased. The rates of the state and local use tax are the same as the rates of the state and local sales tax. There is no duplication of the tax.

The regulation further addresses property purchased outside of Virginia and provides that:

Tangible personal property purchased for use outside the state but later brought into the state is taxed based on the proportion of the cost price or fair market value as the duration of time of use within this state bears to the total useful life of the property. It is presumed that the property will remain in this state for the remainder of its useful life until otherwise proven.

In accordance with the aforementioned authorities, the Taxpayer would be the user and consumer of Display Cases placed at various hospital complexes throughout Virginia and would be liable for the Virginia use tax on these items, provided a like or similar tax has not been paid to another state. Additionally, the selling of space in the Display Cases to local businesses is not subject to the retail sales and use tax. This is evident in the fact that the Taxpayer maintains ownership of the Display Cases, installs and maintains all advertising materials in the Display Cases, capitalizes and depreciates the Display Cases, and removes the Display Cases at the conclusion of the contract with the hospital.

This response is based upon the facts provided as summarized above, and without review by the Department of the underlying contracts germane to the transactions at issue. Any change in the facts or the introduction of new facts may lead to a different result.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5992886112.P