Tax Type
Retail Sales and Use Tax
Description
Printing and cutting dies
Topic
Collection of Delinquent Tax
Date Issued
04-26-2000
April 26, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of the department's retail sales and use tax audit assessments issued to **** (the "Taxpayer"), for the periods May 1996 through March 1999.
FACTS
The Taxpayer is a manufacturer of paper, cardboard boxes and display units. The Taxpayer is contesting the assessment of tax on transactions characterized by the auditor as sales of printing and cutting dies to customers. The dies at issue are designed and fabricated to meet each customer's specific needs with regard to the manufacture of the customer's property. As the dies are specific to each customer, the Taxpayer will usually retain the dies for use in future manufacturing runs of the customer's product or materials. When billing its customers for an initial production run, the Taxpayer may include the charge for the dies or charge the customer on a separate basis.
The Taxpayer contends that the charges for the dies are not taxable, as the charge is, in substance, a design fee and is a non-taxable service. Alternatively, the Taxpayer states that if the charges are considered a sale of tangible personal property, the charges should be exempt, as the Taxpayer is acting in the capacity of an agent for its customers using such dies in an exempt manufacturing activity. Accordingly, the Taxpayer seeks a revision of the department's assessment.
DETERMINATION
Manufacturing
Code of Virginia § 58.1-609.3(2) addresses the manufacturing exemption, and subsection (iii) exempts from the sales and use tax the following:
Machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale. (Emphasis added.)
The term "used directly" when used in relation to manufacturing and processing, is defined under Code of Virginia § 58.1-602 as follows:
. . . those activities which are an integral part of the production of a product including all steps of an integrated manufacturing . . . process, but not including ancillary activities such as general maintenance or administration. (Emphasis added.)
Based on the foregoing statutes, and previous rulings of the department, I agree that the dies in question are directly used in the Taxpayer's manufacturing process. Accordingly, they are exempt from the tax when purchased by the Taxpayer from the fabricator.
Fabrication and Sale of Tangible Personal Property
The fee incurred by the Taxpayer is an expense that is a part of the fabrication costs paid to the fabricator of the dies. Since the dies will be used by the Taxpayer in its manufacturing process, the charges by the fabricator are not subject to the tax provided that the Taxpayer furnishes a properly completed manufacturing certificate of exemption. Once the dies have been used in the manufacturing process in the initial run of the customer's product, the Taxpayer charges its customer for the dies to recoup initial costs. The Taxpayer contends that its charge to the customer is a charge for the initial design and fabrication of the dies used by the Taxpayer, and is not a taxable sale of tangible personal property.
The charge to the customer is not a charge for services, as the Taxpayer is not in the design business. The dies are tangible personal property as defined in Code of Virginia § 58.1--602. Consequently, the transaction at issue represents a sale of tangible personal property subject to the sales and use tax. This issue has been addressed in prior rulings of the department, most notably Public Documents (P.D.) 96-324 (11/8/96) and 97-13 (1/17/97). The facts in the case at issue are similar to those in the public documents, which upheld the assessment of tax.
Agency Relationship
Based on the information before me, there is no documentation to support that the Taxpayer was officially designated as an agent for its customer. I agree that the Taxpayer secured the dies for use in its manufacturing process, and was able to purchase the dies exempt of the tax pursuant to the manufacturing exemption. However, the exemption of the dies based on direct use in manufacturing has no bearing on a separate and distinct sale of tangible personal property to the Taxpayer's customer.
Code of Virginia § 58.1-205 provides that a tax assessment issued by the department is deemed prima facie correct. The burden of proving that an assessment is erroneous is on the taxpayer. Based on all of the information presented, that burden has not been met. Consequently, l must deny the Taxpayer's request for correction.
Legislation
During its 1999 legislative session, the Virginia General Assembly amended the definition of "retail sale" and "sale at retail" to exclude the sale of tooling, dies, molds and patterns under certain conditions. This change was not retroactive, but rather became effective July 1, 1999. Consequently, the law change has no bearing on the Taxpayer's case. Had the intent been to apply the change to periods prior to July 1, 1999, the legislation would have specifically stated that the definition was to be applied retroactively when it became effective July 1, 1999.
Based on the foregoing, l find no basis to revise the audit assessments. With regard to your request for a hearing, the issue involved is a matter of established policy; therefore, a meeting is not necessary. The Taxpayer should return its payment for the balance of tax, penalty and interest totaling $**** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within that time, interest will accrue on the balance due from the original date of assessment. If you should have any questions regarding this matter, please contact ****, of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26096Q
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of the department's retail sales and use tax audit assessments issued to **** (the "Taxpayer"), for the periods May 1996 through March 1999.
FACTS
The Taxpayer is a manufacturer of paper, cardboard boxes and display units. The Taxpayer is contesting the assessment of tax on transactions characterized by the auditor as sales of printing and cutting dies to customers. The dies at issue are designed and fabricated to meet each customer's specific needs with regard to the manufacture of the customer's property. As the dies are specific to each customer, the Taxpayer will usually retain the dies for use in future manufacturing runs of the customer's product or materials. When billing its customers for an initial production run, the Taxpayer may include the charge for the dies or charge the customer on a separate basis.
The Taxpayer contends that the charges for the dies are not taxable, as the charge is, in substance, a design fee and is a non-taxable service. Alternatively, the Taxpayer states that if the charges are considered a sale of tangible personal property, the charges should be exempt, as the Taxpayer is acting in the capacity of an agent for its customers using such dies in an exempt manufacturing activity. Accordingly, the Taxpayer seeks a revision of the department's assessment.
DETERMINATION
Manufacturing
Code of Virginia § 58.1-609.3(2) addresses the manufacturing exemption, and subsection (iii) exempts from the sales and use tax the following:
Machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale. (Emphasis added.)
The term "used directly" when used in relation to manufacturing and processing, is defined under Code of Virginia § 58.1-602 as follows:
. . . those activities which are an integral part of the production of a product including all steps of an integrated manufacturing . . . process, but not including ancillary activities such as general maintenance or administration. (Emphasis added.)
Based on the foregoing statutes, and previous rulings of the department, I agree that the dies in question are directly used in the Taxpayer's manufacturing process. Accordingly, they are exempt from the tax when purchased by the Taxpayer from the fabricator.
Fabrication and Sale of Tangible Personal Property
The fee incurred by the Taxpayer is an expense that is a part of the fabrication costs paid to the fabricator of the dies. Since the dies will be used by the Taxpayer in its manufacturing process, the charges by the fabricator are not subject to the tax provided that the Taxpayer furnishes a properly completed manufacturing certificate of exemption. Once the dies have been used in the manufacturing process in the initial run of the customer's product, the Taxpayer charges its customer for the dies to recoup initial costs. The Taxpayer contends that its charge to the customer is a charge for the initial design and fabrication of the dies used by the Taxpayer, and is not a taxable sale of tangible personal property.
The charge to the customer is not a charge for services, as the Taxpayer is not in the design business. The dies are tangible personal property as defined in Code of Virginia § 58.1--602. Consequently, the transaction at issue represents a sale of tangible personal property subject to the sales and use tax. This issue has been addressed in prior rulings of the department, most notably Public Documents (P.D.) 96-324 (11/8/96) and 97-13 (1/17/97). The facts in the case at issue are similar to those in the public documents, which upheld the assessment of tax.
Agency Relationship
Based on the information before me, there is no documentation to support that the Taxpayer was officially designated as an agent for its customer. I agree that the Taxpayer secured the dies for use in its manufacturing process, and was able to purchase the dies exempt of the tax pursuant to the manufacturing exemption. However, the exemption of the dies based on direct use in manufacturing has no bearing on a separate and distinct sale of tangible personal property to the Taxpayer's customer.
Code of Virginia § 58.1-205 provides that a tax assessment issued by the department is deemed prima facie correct. The burden of proving that an assessment is erroneous is on the taxpayer. Based on all of the information presented, that burden has not been met. Consequently, l must deny the Taxpayer's request for correction.
Legislation
During its 1999 legislative session, the Virginia General Assembly amended the definition of "retail sale" and "sale at retail" to exclude the sale of tooling, dies, molds and patterns under certain conditions. This change was not retroactive, but rather became effective July 1, 1999. Consequently, the law change has no bearing on the Taxpayer's case. Had the intent been to apply the change to periods prior to July 1, 1999, the legislation would have specifically stated that the definition was to be applied retroactively when it became effective July 1, 1999.
Based on the foregoing, l find no basis to revise the audit assessments. With regard to your request for a hearing, the issue involved is a matter of established policy; therefore, a meeting is not necessary. The Taxpayer should return its payment for the balance of tax, penalty and interest totaling $**** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within that time, interest will accrue on the balance due from the original date of assessment. If you should have any questions regarding this matter, please contact ****, of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26096Q
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner