Tax Type
Retail Sales and Use Tax
Description
Computer greeting card design equipment in retail stores
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
05-19-2000
May 19, 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 January 1992 through December 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of selling customer-designed greeting cards. The Taxpayer places free-standing kiosks in retail establishments, mainly drug stores. The kiosks consist of three main parts: a keyboard, hardware with specialized software, and a printer. A customer may select the type of greeting card it wishes to purchase and type in a personalized message. This information is then transferred to card quality paper and dispensed to the customer. The retail establishment charges sales tax on the custom card, and the Taxpayer pays to the retailer a commission on all cards sold from its location.
The Taxpayer was audited and assessed tax on the purchase of kiosks that it places in retail establishments. The Taxpayer contends that the kiosks are exempt manufacturing equipment and should enjoy the manufacturing exemption afforded under Code of Virginia § 58.1-609.3(2).
DETERMINATION
Code of Virginia §58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery, tools, and other items used directly in the manufacture of tangible personal property for sale or resale in the industrial sense. This statute was interpreted by the Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 215 Va. 276, 199 S.E. 2d 511 (1973), which held that the cited statute was intended "to provide exemption for machinery and tools used in ... manufacturing ... products for sale or resale only in the industrial sense." The Virginia Supreme Court held that a fast food retailer did not qualify for the industrial processing exemption since its processing activities were ancillary to the retail service being provided.
Implicit in the court's ruling in Golden Skillet is a recognition that the same item of machinery or equipment may be used in one context in an industrial manner and in another context in a non-industrial manner.
Code of Virginia § 58.1-602 provides, in pertinent part, that the term "industrial in nature" shall include all businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual. Generally, businesses engaged in manufacturing are classified under SIC codes 20 through 39 and are involved in transforming raw materials into useful and marketable products within a factory, plant or mill environment using power driven machinery and material handling equipment.
The Taxpayer contends that the nature of its kiosk business qualifies as an industrial manufacturer under sub-group 2771 of the SIC Code. This industry group number provides that an establishment primarily engaged in the publishing and printing of greeting cards qualifies as an industrial manufacturer. The key word in this classification is "primarily". In the present case, the kiosks, which are owned by the Taxpayer, are placed in drug stores which are primarily in the business of selling drugs and sundry items at retail, not in the business of publishing greeting cards. The Taxpayer purchased the kiosks to provide to its customers a service, i.e., a convenient means of obtaining a personalized greeting card. In addition, the fact that the kiosks are for the use and convenience of the Taxpayer's customers, and not for use by the Taxpayer, further supports the department's position that the industrial manufacturing exemption is not applicable. This determination is consistent with the ruling issued in Public Document (P.D.) 96-50 (4/19/96), copy enclosed.
Based on all of the above, l find that the audit assessment is correct as issued. Please forward your check in the amount of $***** to the department within 30 days from the date of this letter. The check should be sent to *****, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If payment is not received within the allotted time, additional interest will accrue on the outstanding balance. If you have any questions regarding this matter, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/23210K
Rulings of the Tax Commissioner