94-009
Request
January 28, 1994
Audit Division, 6th
Floor
Utah State Tax
Commission
160 East Third South
Salt Lake City, UT
84134-1100
Dear XXXXX,
I am writing at the recommendation of
XXXXX, to request an advisory opinion on the matter of state sales tax and my
business. First, though, let me give
you some background information that might be helpful to you in coming up with
that opinion.
For
years I worked as a writer, producer and director for various advertising
agencies. About three years ago I left
an agency to try working on my own on a freelance basis. I have since been contracted by businesses
and advertising agencies for my expertise in marketing, advertising, writing,
producing and directing. I have been
doing business as XXXXX, a sole proprietorship registered with the State of
Utah. I have kept moderately busy
writing, consulting and producing for businesses and advertising entities. As
of late I have been contracted to oversee entire projects for clients, such as
TV commercials and marketing videos.
When I first started working freelance, I
was told by my accountant that I was not to charge sales tax on my services. My services were considered professional and
therefore exempt from sales tax.
Currently, some of my projects require me
to pay for some of the major costs of production, e.g., subcontractors,
equipment rental, editing time, etc. I
pay sales or use tax on these items, except hired labor, and have been told
that that is all I need do. In fact,
one ad agency controller I know said I didn't have to pay sales tax on items
that were part of a commercial that would be broadcast on television. I pay
that sales tax anyway.
It has come to my attention that several
production and advertising entities have recently been targetted for audits by
the State. I've been told that the main
focus of these audits was sales tax. I
have also been told by several people involved in those audits that there is a
large, fuzzy grey area surrounding what should have sales tax and what should
not. The information I received was ambiguous and contradictory at best, so I
decide to go down to the Utah State Tax Commission offices and get some answers
for myself.
I met with a helpful auditor by the name
of XXXXX who answered my questions about sales tax and photocopied two pages
from the Utah Tax Code. I explained
what kind of work I did and he told me that as long as I pay sales tax on items
like camera rental, film, editting, etc, I did not have to pay it on labor nor
did I have to charge it for my services.
He also said that as long as I was working on advertising or marketing
pieces that I did not own the copyright on, then I did not have to charge sales
tax, as I was not adding value to tangible personal property.
I was greatly relieved after my
conversation with XXXXX, because it confirmed what I had been told from the
beginning. However, in subsequent
discussions I have had with people in the advertising and production business,
I have been told that different auditors interpret the tax code in different
ways.
My questions, then, are these: what, if
any, sales tax should I charge on my professional services and the services of
the subcontractors that I hire? Is there a definitive and easy- to-comprehend
written source of information on sales tax that I can read so that I don't
constantly wonder what needs sales tax and what doesn't? Do I need to charge
sales tax on marketing and advertising materials that are nontangible property
on which I never own the copyright?
I have discussed these matters with XXXXX,
who then reviewed tax code and determined as best he could that I should not be
charging sales tax. But he recommended
that I get an advisory opinion from you.
I have enclosed a list of the various kinds of work I do to help you in
making your determination.
If you need to contact XXXXX, this is his
address: XXXXX.
I would be very thankful for a prompt
reply as I am often bidding projects and am unsure of how I should handle sales
tax on the bids. Thank you in advance
for any definitive light you can shed on this matter.
Sincerely,
XXXXX
What I do at XXXXX:
Make phone calls.
Write scripts.
Write proposals.
Consult on creative concepts.
Direct TV commercials and marketing films.
Write advertising copy.
Meet with clients.
Write treatments for commercials and
videos.
Write screenplays.
Serve as an agency producer.
Supervise video editing and audio sessions.
Create budgets and bids.
Schedule shoots and post production.
Handle finances, payables and receivables.
Make presentations to agencies and other
clients.
Consult on and make presentations for
advertising agencies.
Market my services.
Do marketing consultation.
Hire subcontractors.
Schedule and rent equipment from film
production rental companies.
Scout locations.
Create shot lists.
Purchase unexposed film and video stock.
Attend professional symposiums and
seminars.
Log shots and takes from raw footage.
Keep track of time spent on projects.
Come up with ideas and creative solutions
to clients' problems.
Visualize concepts.
Draw storyboards.
Occasionally travel to locations or
conferences.
Read professional books, journals and
periodicals.
Attend Utah Ad Federation functions.
Entertain clients.
Advise colleagues.
Organize video and audio elements.
Search for, choose and direct music
tracks.
Record scratch tracks.
Contract film processing.
Request and review demo videos.
View films, videos and commercials.
Negotiate.
Pick up and sort correspondence.
Research and purchase computer equipment
and software.
Do paper edits.
Contract and oversee tape dubbing.
Interview and cast talent.
Re: Advisory Opinion - Sales Tax
Application to Various Sales,
Services, Purchases,
and Activity Functions
Dear XXXXX:
Your request for an advisory opinion as to
your responsibilities for collection and payment of sales tax under various
scenarios was referred to the Auditing Division for their analysis.
The division's staff recommendations are
as follows:
1.
Utah Code Annotated Section 59-12-103 imposes the sales tax on the
amount paid or charged for “retail sales of tangible personal property” to final
consumers. U.C.A. Section 59-12-104
exempts “sales of commercials, motion picture films, prerecorded audio program
tapes or records, and prerecorded video tapes by a producer, distributor or
studio to a motion picture exhibitor, distributor, or commercial television or
radio broadcaster.”
2.
Generally, then, the charges to your clients for the services you have
listed in your request for advisory opinion are not subject to the tax when
your client will act as an exhibitor, distributor, or broadcaster as indicated
in the referenced statute. You must
obtain and retain an exemption certificate, Form TC-721 (copy attached), from
each of your clients to evidence the exemption. You are considered the consumer of the various materials,
supplies rentals, etc. that you purchase to perform your work and should pay
the applicable tax on such purchases to your suppliers. You may, however, purchase tax free the
cassette cartridge and tape that will be physically transferred to your
customer. See UCA Section 59-12-104(27).
3.
If you sell produced films, prerecorded audio or video tapes, etc. to
persons other than those specifically exempted by the statutes, you must be
licensed for sales tax purposes and must collect and remit the tax on the total
sales price to your customer (including any charges for services in connection
with the sales). Under this type of
transaction, you would be allowed to purchase tax free for resale only those
items which are ingredient or component parts of what you sell and physically
transfer to your customer.
4.
You are considered the consumer of marketing and advertising materials
that you provide to your clients which are only incidental to the services you
provide. You should pay tax on your
purchases of such materials. If the
essence of your transactions with your customer is the transfer of tangible
personal property, then you should be licensed for sales tax purposes to
collect and remit tax on such taxable sales.
5.
Attached is ordering information for a book containing all of the
statutes and administrative rules for taxes administered by the Utah State Tax
Commission.
Based upon the facts presented in your
letter, we are in agreement with the Auditing Division's recommendations. Obviously, if there are deviations from
these facts, this opinion may be negated.
If you do not agree with this
determination, you may appeal to the Tax Commission for a formal hearing. The results of that hearing would
constitute a declaratory judgment and be appealable to the Utah State Supreme
Court. A Notice of Appeal Rights and a
copy of the Utah Taxpayer Bill of Rights are attached.
Respectfully,
Alice Shearer
Commissioner