Tax Type
Retail Sales and Use Tax
Description
Paper Manufacturer;Samples Withdrawn from Inventory
Topic
Property Subject to Tax
Date Issued
09-14-2001
September 14, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period January 1996 through December 1999. I note that the assessment has been paid in full. I apologize for the delay in the department's response.
FACTS
The Taxpayer is a manufacturer of synthetic paper products for sale or resale. The Taxpayer was audited and assessed tax on paper samples withdrawn from inventory and given to prospective customers. Tax was also assessed on the purchase of bar coding equipment used in the administrative collection of data for marketing purposes. The Taxpayer is taking exception to the taxing of these items and is also requesting abatement of accrued interest included in the audit assessment.
DETERMINATION
Samples Withdrawn from Inventory
During the formative years of the Taxpayer's business, the Taxpayer withdrew paper products for give-away samples in an effort to establish its reputation and product line. The Taxpayer is requesting special consideration for relief of taxes on these withdrawals, claiming the withdrawals were unique in the start-up years of the business.
Title 23 of the Virginia Administrative Code (VAC) 10-210-490, copy enclosed, explains the department's policy with respect to withdrawals from a tax-exempt inventory and provides the following:
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- Any person who withdraws an item of tangible personal property for his own use from an inventory of property on which no tax has been paid must report tax on the cost price of all property withdrawn for purposes other than sale. For example, a retailer who purchases an inventory of clothing exempt from the tax for purposes of resale, and who withdraws an item from such inventory for personal use, gift or donation, must report tax on the cost price of the item unless such gift or donation is otherwise exempt. Similarly, an item withdrawn from inventory for a promotional give-away or other free distribution, is subject to the tax at the time of withdrawal.
Similarly, under Title 23 VAC 10-210-920(C)(3), products withdrawn from a manufacturer's inventory and given away as samples are taxable.
The department's policy with respect to give-away samples is longstanding. There is no provision in either the statutes or the regulations that would grant relief from these items. Based on all of the above, I find no basis for relief regarding paper products withdrawn from inventory and given away as sample items. These items were properly held taxable in the audit.
Bar Coding Equipment
The Taxpayer purchased bar coding equipment which, according to the Taxpayer, assists in the administrative collection of data. In addition, the Taxpayer has various customers that require bar coding on all products purchased from the Taxpayer. Such use would appear to qualify as a production function. The Taxpayer is requesting that the bar coding equipment held taxable be removed from the audit assessment, asserting that the equipment is used directly in the manufacturing process.
A review of Title VAC 10-210-920 reveals that manufacturing and processing activities are generally divided into three categories: administration, production, and distribution. As a general rule, items used in administration and distribution activities are taxable, while items used directly in production activities are exempt. In the present case, the bar coding equipment is apparently used in both taxable administrative activities and also exempt production activities.
VAC 10-210-920.D addresses machinery, tools, etc., used in both taxable and exempt functions and provides the following:
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- 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 the 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 by the Taxpayer and the auditor, I am unable to determine the preponderance of use of the bar coding equipment at issue. The auditor will contact the Taxpayer in order to review documentation to determine if this equipment qualifies for the manufacturing exemption.
Audit Interest
The Taxpayer is requesting waiver of the interest associated with the audit liability. Code of Virginia § 58.1-1812, copy enclosed, mandates the application of interest to any assessment of tax. Interest cannot be waived unless the associated tax is waived.
Conclusion
There is no basis to abate the portion of the assessment relating to paper products withdrawn from inventory and distributed to customers at no charge. A representative from the department's will contact the Taxpayer to review documentation and determine if the bar coding equipment qualifies for the manufacturing exemption. Once that determination is made, the assessment may be revised as appropriate. If a revision is necessary, the department will issue a refund of the tax and interest paid on the portion of the assessment relating to the purchase of the bar coding equipment.
If you should have any questions regarding this determination, please contact ***** in the department's Policy Development Office at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/27490K
Rulings of the Tax Commissioner