Tax Type
Retail Sales and Use Tax
Description
Computers used in newspaper publication
Topic
Exemptions
Property Subject to Tax
Date Issued
10-17-2000
October 17, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to **** (the "Taxpayer") for the period of February 1994 through December 1996. I apologize for the delay in responding to your appeal.
The Taxpayer is in the communications business, with its main activity being the publishing of newspapers. As a result of a recent audit, the Taxpayer was assessed sales tax on the purchase of a number of computers and computer-related items. The computers in question perform numerous functions, including reporting, editing, pagination, transmission, etc. The computers convert the newspapers to digital signals that are transmitted via satellite, one page at a time, to the Taxpayer's thirty-three regional printing sites. The newspaper is then printed, bundled, and circulated from the printing sites. The auditor has held the computers as being used in pre-production activities and therefore taxable. The Taxpayer believes that the computers are used directly in the production of the newspaper and are exempt. The Taxpayer is also taking exception to computers used in their Graphics Department, and the assessment of audit penalty.
Code of Virginia § 58.1-609.3(2)(v) provides an exemption for equipment, printing or supplies when such items are used directly to produce publications described in Code of Virginia §58.1-609.6(3). Code of Virginia § 58.1-609.6(3) describes an exempt publication to be "any publication issued daily, or regularly at average intervals not exceeding three months, and advertising supplements and any other printed matter ultimately distributed with, or as a part of such publication." There is no question that the Taxpayer's newspaper qualifies as an exempt publication under Code of Virginia § 58.1-609.6(3).
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) provides that "items of tangible personal property which are used directly in manufacturing . . . are . . . [those] which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Ancillary activities such as general maintenance or administration... or items which are essential to the operation of a business but not an immediate part of the actual production are not used directly in manufacturing." (Emphasis added.)
The Taxpayer's Production Network
With the advent of new innovative technology over the course of the last ten years, the manner in which companies conduct business has changed significantly. In the present case, functions conducted by newspaper publishers, which have traditionally enjoyed the manufacturing exemption, now may be integrated with traditionally taxable functions. This is evident in cases where reporting, editing, pagination, typesetting, and other functions may be performed by the same computer, and possibly by the same person.
Title 23 VAC 10-210-6020, copy enclosed, addresses the department's position with respect to "typesetting" and "electronic prepress" as they relate to the publishing industry. This regulation provides that such functions qualify for the industrial manufacturing exemption provided under Code of Virginia § 58.1-609.3(2), when performed by an industrial printer or sold to an industrial printer. At the same time, taxable newsgathering activities (i.e., reporting, editing, etc.) may be integrated with exempt typesetting functions. In other words, there may be circumstances where the same equipment (in the present case computer hardware and software) is used in both taxable and exempt functions.
Title 23 VAC 10-210-920(D) provides for the application of the tax when a single piece of equipment is used in both taxable and exempt activities, as follows:
Based on the information furnished in your letter, I am unable to determine to what extent the computers in question may perform various taxable or exempt functions. If a computer is used solely or preponderantly in taxable functions (i.e., reporting, newsgathering, and editing), the computer and related software will be taxable. Likewise, if a computer is used solely or preponderantly in exempt functions (i.e., pagination, typesetting, and electronic prepress activities as defined in VAC 10-210-6020), the computer and related software will be exempt.
Other Purchases - Graphics Department
The Taxpayer is taking exception to the taxing of computer equipment, and the maintenance contracts for such equipment, which is used in the Taxpayer's Graphics Department. Based on the information furnished in your letter, these computers are used to perform the following three functions: 1) convert photograph and graphic color and make edits, 2) combine graphics and photographs with newspaper text and forward to an electronic imager, and 3) receive files from imaging, compress them and send via satellite to a press site for printing.
Based on the above discussion under "The Taxpayer's Production Network," it appears that the first two functions constitute taxable pre-production activities. The third activity would constitute exempt electronic prepress activities in accordance with Title 23 VAC 10-210-6020. I will instruct the auditor revisit this issue when reviewing the Taxpayer's Production Network.
Audit Penalty
In regard to the audit penalty, the Taxpayer believes there are exceptional and mitigating circumstances that warrant the waiver of audit penalty in this case. Upon revision of the audit in accordance with this determination, the department will recalculate the use tax compliance ratio, and adjust the audit penalty accordingly.
I am referring this audit back to the **** District Office for further review and possible revisions. It is noted in your letter that in the event the department should reach an adverse decision in this matter, the Taxpayer requests a meeting with members of my staff. This request will be granted should this matter not be resolved at the District Office level.
If you should have any questions, please contact ****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22179K
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to **** (the "Taxpayer") for the period of February 1994 through December 1996. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the communications business, with its main activity being the publishing of newspapers. As a result of a recent audit, the Taxpayer was assessed sales tax on the purchase of a number of computers and computer-related items. The computers in question perform numerous functions, including reporting, editing, pagination, transmission, etc. The computers convert the newspapers to digital signals that are transmitted via satellite, one page at a time, to the Taxpayer's thirty-three regional printing sites. The newspaper is then printed, bundled, and circulated from the printing sites. The auditor has held the computers as being used in pre-production activities and therefore taxable. The Taxpayer believes that the computers are used directly in the production of the newspaper and are exempt. The Taxpayer is also taking exception to computers used in their Graphics Department, and the assessment of audit penalty.
DETERMINATION
Code of Virginia § 58.1-609.3(2)(v) provides an exemption for equipment, printing or supplies when such items are used directly to produce publications described in Code of Virginia §58.1-609.6(3). Code of Virginia § 58.1-609.6(3) describes an exempt publication to be "any publication issued daily, or regularly at average intervals not exceeding three months, and advertising supplements and any other printed matter ultimately distributed with, or as a part of such publication." There is no question that the Taxpayer's newspaper qualifies as an exempt publication under Code of Virginia § 58.1-609.6(3).
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) provides that "items of tangible personal property which are used directly in manufacturing . . . are . . . [those] which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Ancillary activities such as general maintenance or administration... or items which are essential to the operation of a business but not an immediate part of the actual production are not used directly in manufacturing." (Emphasis added.)
The Taxpayer's Production Network
With the advent of new innovative technology over the course of the last ten years, the manner in which companies conduct business has changed significantly. In the present case, functions conducted by newspaper publishers, which have traditionally enjoyed the manufacturing exemption, now may be integrated with traditionally taxable functions. This is evident in cases where reporting, editing, pagination, typesetting, and other functions may be performed by the same computer, and possibly by the same person.
Title 23 VAC 10-210-6020, copy enclosed, addresses the department's position with respect to "typesetting" and "electronic prepress" as they relate to the publishing industry. This regulation provides that such functions qualify for the industrial manufacturing exemption provided under Code of Virginia § 58.1-609.3(2), when performed by an industrial printer or sold to an industrial printer. At the same time, taxable newsgathering activities (i.e., reporting, editing, etc.) may be integrated with exempt typesetting functions. In other words, there may be circumstances where the same equipment (in the present case computer hardware and software) is used in both taxable and exempt functions.
Title 23 VAC 10-210-920(D) provides for the application of the tax when a single piece of equipment is used in both taxable and exempt activities, as follows:
- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.
Based on the information furnished in your letter, I am unable to determine to what extent the computers in question may perform various taxable or exempt functions. If a computer is used solely or preponderantly in taxable functions (i.e., reporting, newsgathering, and editing), the computer and related software will be taxable. Likewise, if a computer is used solely or preponderantly in exempt functions (i.e., pagination, typesetting, and electronic prepress activities as defined in VAC 10-210-6020), the computer and related software will be exempt.
Other Purchases - Graphics Department
The Taxpayer is taking exception to the taxing of computer equipment, and the maintenance contracts for such equipment, which is used in the Taxpayer's Graphics Department. Based on the information furnished in your letter, these computers are used to perform the following three functions: 1) convert photograph and graphic color and make edits, 2) combine graphics and photographs with newspaper text and forward to an electronic imager, and 3) receive files from imaging, compress them and send via satellite to a press site for printing.
Based on the above discussion under "The Taxpayer's Production Network," it appears that the first two functions constitute taxable pre-production activities. The third activity would constitute exempt electronic prepress activities in accordance with Title 23 VAC 10-210-6020. I will instruct the auditor revisit this issue when reviewing the Taxpayer's Production Network.
Audit Penalty
In regard to the audit penalty, the Taxpayer believes there are exceptional and mitigating circumstances that warrant the waiver of audit penalty in this case. Upon revision of the audit in accordance with this determination, the department will recalculate the use tax compliance ratio, and adjust the audit penalty accordingly.
I am referring this audit back to the **** District Office for further review and possible revisions. It is noted in your letter that in the event the department should reach an adverse decision in this matter, the Taxpayer requests a meeting with members of my staff. This request will be granted should this matter not be resolved at the District Office level.
If you should have any questions, please contact ****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22179K
Rulings of the Tax Commissioner