Could a sign manufacturer remove service, billboard, freight, and church transactions from audit without documents proving the claimed exemptions?

Plain-English summary

A multistate sign manufacturer challenged twelve Virginia audit invoices as service-only work, advertising, exempt freight, or a church sale. It did not provide the requested contracts, invoices, or exemption documentation.

Virginia upheld every adjustment. Each claimed exception failed either on the governing rule or on missing proof.

Sign-related labor and services

Virginia sales price includes services that are part of a tangible-property sale. The Department found the second trip, surveys, removal, permits, and procurement connected with power supplies, signs, materials, or clips. The appeal materials did not establish independent service-only transactions.

Billboard rentals and freight

The advertising exemption applies to an advertising business providing planning, creation, or placement services. Based on the company's website and missing rental contracts, Virginia found it was not such a business; its billboard rentals remained taxable.

Transportation charges must be separately stated. The taxpayer did not document that the disputed charge was customer shipping separately shown on an invoice.

Church sale

A qualifying nonprofit church purchase can be exempt, but the dealer must substantiate it. The taxpayer supplied neither a valid exemption certificate nor a Department nonprofit-exemption letter, so the sale remained taxable.

What this means for you

• Preserve contracts connecting each charge to the actual transaction.
• Separately stated labels do not control when services accompany property.
• Advertising status depends on the business and services actually provided.
• Keep invoices proving separately stated transportation.
• Obtain valid exemption documentation for nonprofit sales.

Common questions

Q: Are sign surveys and permit services always taxable?

A: This ruling taxed them because they were connected with property sales and contrary proof was insufficient.

Q: Is every billboard rental exempt advertising?

A: No. The seller must qualify as an advertising business providing the defined services.

Q: Was the church's status alone enough?

A: No. The dealer needed a valid certificate or Department exemption letter.

Citations and references

• Va. Code § 58.1-602 — sales price and advertising
• Va. Code §§ 58.1-609.5(5), 58.1-609.6(5) — transportation and advertising
• Va. Code §§ 58.1-609.10(16), 58.1-609.11, 58.1-623(A) — nonprofit exemption proof
• 23 VAC 10-210-40, 10-210-41, 10-210-280 — advertising and certificates

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-40

Original ruling text

April 25, 2019

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 May 2012 through June 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer sells and services manufactured signs in Virginia and more than 20 other states. The Taxpayer is contesting twelve invoices upon which the sales tax was assessed in the audit. The auditor assessed the tax on the invoices at issue because the tax was not charged at the time the sales were made. The Taxpayer disputes the tax assessed on the invoices for the following reasons: (1) the transactions were for labor or services only and no tangible personal property was sold; (2) the transactions were for surveying, removal and permits and no tangible personal property was sold; (3) the transaction was for freight charges to its customer; (4) the transactions were for advertising; or (5) the transaction was made to a church.

DETERMINATION

Labor and Services

Virginia Code § 58.1-602 defines sales price 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.

In regard to the invoices listed below, the Taxpayer asserts that the charges are for labor or services, and no tangible property was sold to the customer. The Taxpayer maintains that the retail sales and use tax does not apply to these invoices.

Invoice *

The actual invoice number at issue is *. The Taxpayer maintains that the invoice is for repair labor only. The invoice was held taxable by the auditor because the $*** ‘second trip’ charge is taxable as a service in connection with the sale of power supplies.

Invoice *

The Taxpayer provides that this invoice is for a survey, removal and a permit, and no tangible personal property was improved or exchanged. The auditor held the transaction taxable in the audit because the services at issue were sold in the connection with the sale of material and clips.

Invoice *

The Taxpayer disputes the inclusion of this invoice in the audit, stating that it was for the survey of a sign only, and no tangible personal property was sold or exchanged. The transaction was held taxable by the auditor because it was believed that the site survey was part of a sign that was sold. During the performance of the audit, the Taxpayer did not provide additional documentation (invoices, contracts, etc.) related to this job or to the customer as requested by the auditor.

Invoice *

The Taxpayer states that this invoice is for removal and a permit. This transaction was held taxable by the auditor because the services (site survey, permit/procurement and removal) were sold in connection with the sale of a sign.

Based upon the information provided, the labor and services at issue in these invoices are sold in connection with the sale of tangible personal property. As such, the charges should have been included in the sales price on the invoices that were subject to the tax as considered in Virginia Code § 58.1-602. The information provided with the Taxpayer’s appeal regarding these invoices is insufficient to make a determination that the audit assessment is incorrect. Accordingly, the assessment is correct as issued.

Advertising

Virginia Code § 58.1-609.6 5 provides that the retail sales and use tax does not apply to “Advertising 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 use in such advertising.

Title 23 of the Virginia Administrative Code (VAC) 10-210-40 defines advertising business as “any person or group of persons providing advertising….”

Title 23 VAC 10-210-41 provides in pertinent part that:

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.

Based on the cited authorities and a review of the Taxpayer’s website, it is clear that the Taxpayer does not operate an advertising business or provide advertising as defined above. As such, the Taxpayer’s billboard rentals do not qualify for the advertising exemption; therefore, they are subject to the retail sales and use tax. The Taxpayer did not provide the billboard rental contracts, as requested by that auditor that would have explained the services provided by the Taxpayer to its customers. Accordingly, the assessment is upheld as issued.

Freight Charges

Virginia Code § 58.1-609.5 5 provides that the retail sales and use tax does not apply to “Transportation charges separately stated.”

As considered in the statute, freight charges must be separately stated on an invoice in order to be exempt of the retail sales and use tax. The Taxpayer was given the opportunity to provide additional information demonstrating that that the charge at issue was for shipping to the Taxpayer’s customer and that the charge was separately stated on the invoice. However, the Taxpayer failed to provide such information. The information provided in the Taxpayer’s appeal is insufficient to warrant overturning the assessment related to this transaction. Accordingly, the assessment is upheld as issued.

Church Exemption

Virginia Code § 58.1-609.10 16, provides, in pertinent part, that the retail sales and use tax does not apply to “Tangible personal property purchased by nonprofit churches that are exempt from taxation under § 501(c)(3) of the Internal Revenue Code, or whose real property is exempt from local taxation pursuant to the provisions of § 58.1-3606.”

Virginia Code § 58.1-623 A provides that:

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

Title 23 VAC 10-210-280 states that:

Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.

In order for the exemption related to sales made to a church to apply, the sale must meet one of the criteria listed in Virginia Code § 58.1-609.10 16. Additionally, the church must provide to the Taxpayer a valid exemption certificate or a Department issued nonprofit exemption letter as provided in Virginia Code § 58.1-609.11 in order for the sale to be made exempt of the tax. The Taxpayer was given the opportunity to provide an exemption certificate or nonprofit exemption letter from the church to support its contention that the assessment is incorrect, but failed to provide such information. The information provided in the Taxpayer’s appeal is insufficient to warrant overturning the assessment related to this transaction. Accordingly, the assessment is upheld as issued.

CONCLUSION

Based on this determination, there is no basis to revise the assessment and it is upheld as issued. Revised bills will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding bills are paid within 30 days of the date of the bill. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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/884P