Tax Type
Retail Sales and Use Tax
Description
Off-site computerized equipment and cameras
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-26-2000
April 26, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letters requesting correction of the sales and use tax audit assessment issued to ****** (the Taxpayer). I apologize for the delay in responding to your letters. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a publisher of military newspapers. An audit for the period May 1995 through April 1998 resulted in the assessment of sales tax for unremitted sales tax and use tax for certain untaxed purchases.
The Taxpayer takes exception to the use tax assessed on computer software and hardware and cameras furnished to military personnel at remote locations for their use in news gathering and composing news articles for insertion into newspapers produced by the Taxpayer. The Taxpayer maintains that such property is an integral part of its production process and should therefore qualify for the industrial manufacturing exemption set out in Code of Virginia § 58.1-609.3(2).
The Taxpayer also requests waiver of the entire audit penalty based on certain circumstances.
DETERMINATION
Offsite Computerized Composing Equipment and Cameras
In defining the term "manufacturing" for purposes of the industrial manufacturing exemption, Code of Virginia § 58.1-602 also provides that the "term 'manufacturing' shall also include the necessary ancillary activities of newspaper and magazine printing when such activities are performed by the publisher of any newspaper or magazine for sale daily or regularly at average intervals not exceeding three months." (Emphasis added). Accordingly, the necessary ancillary activities of publishers must directly relate to the actual printing process and must be performed by the publisher to gain the exemption. The latter requirement is explained in Public Document (P.D.) 85-144
(7/1/85).
Title 23 of the Virginia Administrative Code (VAC) 10-210-920 explains that the industrial manufacturing exemption applies to "the production line of a plant . . . starting with the handling and storage of raw materials at the plant site ...." This regulation further provides that "tangible personal property used in activities conducted away from a plant site . . . is deemed not to be used directly in manufacturing or processing." In addition, this regulation states that "items of tangible personal property which are used directly in manufacturing are machinery . . . or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. (Emphasis added).
As can be seen, the regulation provides specific criteria that must be applied in the administration of this exemption. Historically, these criteria have been examined in analogous situations. For example, in the 1978 case of The Daily Progress v. Commonwealth of Virginia, the Charlottesville Circuit Court held that the department's assessment of the offsite use of cameras and camera equipment was valid. The Virginia Supreme Court, finding no reversible error, refused the petition for appeal.
The Daily Progress decision confirms the department's position that newsgathering and other activities conducted away from the plant site are not a direct part of the production process. The plant site requirement is further discussed in P.D. 92-22 (4/14/92), 95-49 (3/20/95), and 85-34 (2/25/85).
While The Daily Progress decision clearly held the offsite use of cameras to be taxable, the department also deems the onsite use of equipment and supplies to be taxable if those items are predominantly used in preproduction activities, such as writing of news articles and stories. This concept is discussed in greater detail in P.D. 85-118 (6/6/85) and 96-304 (10/25/96).
I would also note that the courts have adopted the rule of strict construction of the exemptions from the retail sales and use tax. If all of the criteria of the exemption are not satisfied, then the exemption does not apply.
Based on the established policies set out above, and the strict construction of exemption statutes required by the courts, the contested items used offsite do not satisfy the plant-site and immediate-use-in-production criteria of the industrial manufacturing exemption and are therefore taxable. Accordingly, l find no basis for their removal from the department's audit.
Audit Penalty
The Taxpayer has been assessed penalty of **** on unremitted sales tax. It is the department's longstanding policy that penalty cannot be waived when a taxpayer has collected the sales tax but has failed to remit it to the department. Accordingly, the penalty applied on the unremitted sales tax cannot be waived.
The Taxpayer has also been assessed penalty of **** on untaxed purchases. On second audits, penalty may be waived when the use tax compliance ratio meets or exceeds 60%. In the current audit, the Taxpayer's use tax compliance ratio was found to be 1%. Accordingly, an acceptable level of compliance was not achieved on this second audit.
Penalty may also be waived when the audit deficiency occurs in a new area not covered by a prior audit, provided the application of the tax is not clearly established under existing law, regulations or other published documents of which the taxpayer reasonably should have had knowledge. Based on the existing laws, judicial interpretations of those laws, and established policies set out in public documents issued by the department, l find no basis to treat the offsite equipment issue as a new area.
In addition, penalty may be waived when there is evidence of exceptional mitigating circumstances. However, the department consistently has held that accounting personnel changes do not constitute exceptional mitigating circumstances. Based on all of the foregoing, l find no basis to justify the waiver of the penalty assessed in this case.
Conclusion
Under separate cover, the Taxpayer will receive updated bills for the outstanding liabilities. Such updated liabilities should be paid within 60 days of this letter to avoid further interest charges. If you have any questions regarding this matter, you may contact **** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20420R
TO WHOM IT MAY CONCERN
Under the authority of § 58.1-1 of the Code of Virginia, l 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