Was a custom digital orthophotograph taxable because the completed image was delivered on a CD?

Subject

Digital orthophotograph is the purchase of exempt professional service.

Plain-English summary

A custom digital orthophotograph was an exempt professional photogrammetric service even though the final image was delivered on a CD. The vendor performed flight and photography work, triangulation, scanning, and production of a geometrically corrected image.

Virginia applied the true-object test. The customer principally bought the specialized professional work required to create the orthophotograph, not the physical disc. Delivering the end product on tangible media did not convert that service into a taxable retail sale.

The Department removed the orthophotograph purchase from the audit and abated the related bill in full. It warned that additional copies of an existing orthophotograph or other photogrammetric product on CD or another medium would be taxable because those copies would not themselves be qualifying professional services.

What this means for you

• Custom professional work can remain exempt when its result is delivered on tangible media.
• The true object of the engagement controls.
• The initial custom product and later duplicate copies can receive different tax treatment.
• Vendor descriptions of the professional work help establish the transaction's substance.

Common questions

What is a digital orthophotograph in this ruling?

An aerial photograph geometrically corrected so its scale is uniform across the image.

Why did the CD not make the purchase taxable?

The CD was only the delivery medium for the professional photogrammetric service.

Would extra copies be exempt?

No. The ruling said additional copies on tangible media were taxable.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040(D).
• Virginia Public Documents 86-207 and 95-90.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-178

Original ruling text

August 16, 2010

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

Dear *:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 2006 through December 2008. I apologize for the delay in responding to you.

FACTS

The Taxpayer is an engineering, architectural, surveying and consulting business that was audited and assessed use tax on the purchase of a digital orthophotograph. The Taxpayer maintains that the purchase qualifies for exemption based on previous rulings by the Department, which state that the provision of photogrammetric services is an exempt professional service under Va. Code § 58.1-609.5 1.

DETERMINATION

The Taxpayer states that a computer disc ("CD") was the only tangible personal properly received in this transaction. A letter provided by the vendor states, "This project involved professional services for flight and photography, triangulation, scanning and the production of a digital ortho." The digital orthophotograph was encoded on a CD and then transferred to the Taxpayer.

In Public Document (P.D.) 86-207 (10/17/86), and later in P.D. 95-90 (4/28/95), the Department ruled that persons providing photogrammetric services are providing professional services and the charges for such services are exempt from the sales and use tax. Based on the application of the "true object test" discussed in Title 23 of the Virginia Administrative Code 10-210-4040 D and P.D. 86-207, the true object sought by customers is the photogrammetric services rather than the tangible personal property produced by those services. Thus, the transfer of the end product of these services via a tangible medium does not make the transaction a retail sale of tangible personal property.

Based on information obtained by the Department, digital orthophotography is a type of photogrammetric service. The digital orthophotograph is produced from aerial photographs. The photograph must be geometrically corrected so that the scale is uniform across the entire image. The digital orthophotograph can then be saved to a tangible storage medium for transfer to customers. The production of digital orthophotographs requires the same professional skills that are required to produce traditional photogrammetric products. Thus, the "true object" sought by the Taxpayer in the contested purchase transaction is the professional services to produce the digital orthophotograph, rather than a CD encoded with the digital orthophotograph. The purchase of the digital orthophotograph is the purchase of a professional service and is exempt from the sales tax.

Accordingly, the audit assessment issued on bill number * has been abated in full to reflect the removal from the audit of the digital orthophotograph purchase. The Department's records indicate that the Taxpayer has paid the remaining balance of the audit assessment. Thus, the audit assessment has been paid in full. The Taxpayer should note that if it purchases additional copies of digital orthophotographs or other photogrammetric products on CD or another tangible medium, this type of transaction is not a qualifying purchase of professional services and is subject to sales or use tax.

The Code of Virginia section, regulation and public documents cited, along with other reference documents, 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 concerning this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3580005376.S