Could an advertising company remove separately stated services, invalidate the audit sample, or limit review to three years after not filing returns?

Plain-English summary

Virginia upheld the entire assessment because the company did not prove that the disputed invoices were exempt media advertising, that the sample was flawed, or that tax had been paid on audited property. Advertising concept, writing, design, photography, production supervision, and placement for specific media campaigns could be exempt.

The audit exceptions, however, involved tangible property or transactions not shown to relate to a specific media campaign. Several invoices offered on appeal were not even among the audit exceptions, and the remaining samples did not carry the company's burden.

Virginia also upheld the statistical sample. Sampling was authorized to reach an equitable assessment, and the company supplied no evidence that the selected period was unrepresentative.

Finally, the company had been required to register, collect tax, and file returns but did not. That nonfiling allowed Virginia to examine and assess six years rather than three. The company also failed to prove tax had already been paid on the business property.

What this means for you

• Link advertising work to a specific media campaign in contracts and invoices.
• Separately stated service wording does not override the transaction's substance.
• Challenge samples with quantitative evidence.
• Failure to file can extend Virginia's audit period to six years.

Citations and references

• Va. Code §§ 58.1-202(1), 58.1-205, 58.1-602, 58.1-609.5(1), 58.1-609.6(5), 58.1-612, and 58.1-634.
• 23 VAC 10-210-41(A) and (C).
• 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).
• Virginia Public Documents 93-130 and 97-446.

Subject

Taxpayer did not file returns

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-125

Original ruling text

July 1, 2011

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 seek correction of the retail sales and use tax assessment issued for the period April 2004 through September 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a Virginia corporation engaged in the advertising and marketing business on behalf of its clients. The Taxpayer provides advice and assistance to its clients in promoting their businesses. The Taxpayer provide, certain tangible personal property, such as brochures, business cards and other written and visual materials for its clients, as well as promotional material produced on other media. The Taxpayer's standard procedure in billing clients involves submission of an invoice detailing charges for Services rendered, tangible personal property, costs advanced and applicable taxes. Charges for services, property provided, cost advances and taxes are all separately stated on the Taxpayer's invoice. Each contested issue will be addressed separately below.

DETERMINATION

Separately Stated Service Charges

The Taxpayer maintains that the auditor calculated the sales tax liability on the entire amount billed on invoices and did not subtract separately stated charges for services and other items that are exempt from the tax. Relying on Va. Code §§ 58.1-609.5 1 and 58.1-609.6 5, the Taxpayer asserts that it was assessed tax on professional services performed, even though such services were separately stated on the invoices. The Taxpayer contends the proper amount of tax should be determined based upon the sales of property only and not on services provided. On appeal, the Taxpayer provided sample invoices to support its contention that transactions are erroneously included in the audit that separately state charges for services that are exempt from the tax.

Virginia Code § 58.1-609.6 5 provides that the retail sales and use tax does 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 such advertising."

Title 23 of the Virginia Administrative Code (VAC) 10-210-41 A states, in pertinent part:

The tax does not apply to charges by an advertising business for professional services in the planning, creating, or placing of advertising in newspapers, magazines, billboards, direct mail, radio, television, or other media regardless of how such charges are computed by the advertising business and whether or not such business actually places the advertising in the media.

The tax does not apply to charges by an advertising business for the provision of concept, writing, graphic design, mechanical art, photography and production supervision in the development of an advertising campaign, whether or not all aspects of the campaign are actually performed by the same advertising business.

Title 23 VAC 10-210-41 C states, in pertinent part:

The tax does not apply to the total charge made by an advertising business for the creation or placement of advertising in the media, regardless of the method(s) used in computing such charge, as for example by fixed fee, hourly rate, percentage of media placed, or other method. Nor does the tax apply to handling fees or cost plus charges added to out of pocket expenses incurred by advertising businesses on behalf of their clients.

In Public Document (P.D.) 97-446 (11/7/97), the taxpayer took exception to the tax assessed on purchases from advertising businesses for various services and products. The taxpayer maintained that the purchases were for exempt media advertising services. The Tax Commissioner ruled that advertisements placed in publications of general circulation to the public constitute media advertisements and are not subject to the tax. Charges to create and produce photography for specific media advertising campaigns were not held taxable because the activities constituted exempt media advertising services. The Tax Commissioner further ruled that materials which only served an informational or administrative purpose did not constitute the provision of media advertising and were subject to the tax.

Pursuant to Va. Code § 58.1-205 "[a]ny assessment of tax by the Department shall be deemed prima facie correct." The burden of proving that the assessment is incorrect lies with the taxpayer. "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 the exemption." Golden Skillet Corp. v. Commonwealth , 24 Va. 276, 199 S.E.2d 511 (1972).

Pursuant to the aforementioned references, the transactions included in the audit exceptions were held taxable as sales of tangible personal property and not advertising for specific media campaigns. In order for any of these transactions to be removed from the audit exceptions, the Taxpayer must prove that the transactions were erroneously held in the audit and that the tax assessment is incorrect. Pursuant to Va. Code § 58.1-205, the Taxpayer has failed to meet that burden. The sample invoices provided by the Taxpayer do not support the Taxpayer's contention that the assessment is incorrect. Invoices 3254, 3255, 3256, 4187, 4189, 3300, 3301, 3302, and 3303 are not included in the audit exceptions. Invoices 4186, 4188, 3320 and 3277 are included in the audit exceptions because it is unclear that these transactions relate to advertising for a specific media campaign. Accordingly, the assessment is correct as issued.

Statistical Sampling

The Taxpayer maintains that the sample used is an unrepresentative period from which to extrapolate the Taxpayer's actual sales tax liability for prior periods and does not measure actual sales. The Taxpayer states that a statistical sample was taken of several months of invoices sent by the Taxpayer to its clients, and the results were projected over the entire audit period. The Taxpayer contends that the statistical projection fails to impose sales tax on items actually sold during the audit period, and instead determines a hypothetical amount of sales that may or may not measure the correct amount of tax.

Virginia Code § 58.1-202 1 provides that the Tax Commissioner shall "[s]upervise the administration of the tax laws of the Commonwealth, insofar as they relate to taxable state subjects and assessments thereon, with a view to ascertaining the best methods of reaching all such property, of effecting equitable assessments and of avoiding conflicts and duplication of taxation of the same property." This statute gives the Tax Commissioner wide latitude in the methods used to calculate an equitable assessment. Under this statute, the Department is authorized to use sample methodologies in audits.

Sampling is frequently used by the Department as it reduces the number of records reviewed and the amount of time required to complete audits. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid.

Pursuant to Va. Code § 58.1-205, to invalidate the sample, a taxpayer must demonstrate that a sample used in an audit is not representative of the audit period or that it is flawed in some other manner. In this instance, the Taxpayer has provided no evidence that the sample is flawed or unrepresentative of the audit period. Accordingly, I find the sample used in this instance is proper, and a change is not warranted.

Personal Property Taxed

The Taxpayer maintains that is was incorrectly assessed sales and use tax on tangible personal property that it owned and used in its business. The Taxpayer maintains that the sales and use tax was paid by the Taxpayer to the sellers of such property. The Taxpayer contends that it was assessed tax on property that was acquired more than three years prior to the assessment of tax. The Taxpayer maintains that it was not required to retain records for property purchased during the period.

Virginia Code § 58.1-634 states:

The taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return , the taxes may be assessed, or a proceeding in court for the collection of such taxes may be begun without assessment at any time within six years from such date . The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so. [Emphasis added.]

In P.D. 93-130 (8/19/93), the taxpayer was required to register and collect the retail sales tax on its sales to Virginia customers, pursuant to Va. Code § 58.1-612. The taxpayer was required to file a return and failed to do so; therefore, the extension of the period of limitations back six years was correct.

In this instance, the Taxpayer was required to file returns and collect the tax. Because the Taxpayer did not file returns, the Tax Commissioner is authorized to examine the Taxpayer's records beyond the three-year statute of limitations. Accordingly, the extension of the audit period back six years, and the review of the Taxpayer's records for that period are proper under the law. Furthermore, the Taxpayer has not provided any evidence that tax was paid on the transactions at issue.

CONCLUSION

Based upon this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulation and public documents 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 determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4550106740.P