Tax Type
Retail Sales and Use Tax
Description
Printer; Preflight Equipment Subject to Tax
Topic
Exemptions
Property Subject to Tax
Date Issued
10-29-2001
October 29, 2001
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 May 1996 through April 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a commercial printer that enjoys the industrial manufacturing and processing exemption. The Taxpayer was audited and assessed tax on equipment used in its "preflight" department. The Taxpayer purchases exempt computer equipment and software to be used directly in their production process. Prior to integrating the equipment and software into the production process, the Taxpayer tests the equipment in its preflight department to ensure the equipment will perform to specifications. The Taxpayer believes that equipment used in the preflight department is used directly in the production process and should be exempt from the tax. The Taxpayer is requesting that such equipment be removed from the audit findings.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, tools, repair parts, replacements, fuel, power, or supplies, used directly in manufacturing products for sale or resale. The term "used directly" is defined in Code of Virginia § 58.1-602 and refers to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process.
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) explains that items of tangible personal property which are used directly in manufacturing are machinery, tools, repair parts, fuel, power, energy, 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). The terms "indispensable" and "immediate" are pivotal in determining whether or not an item qualifies as direct use when referring to manufacturing and processing.
The Taxpayer, being a commercial printer, enjoys the industrial manufacturing and processing exemption for its printing operation. Based on the information presented, the activities of the preflight department are preliminary to the actual production process. While the testing of exempt equipment and software may be a necessary function, it is not an immediate or indispensable part of the production process.
I would note that Title 23 VAC 10-210-920(C)(2) does allow an exemption for production-line testing and quality control. However, the testing in the present case takes place prior to the production process. Therefore the equipment used in the preflight department does not qualify for exemption.
Based on all of the above, I find no basis for revising the audit. The Taxpayer's check in the amount ***** should be mailed to the department within 30 days from the date of this letter. Your check may be sent to *****, Office of Policy and Administration, Policy Development, P.O. Box 1880, Richmond, Virginia 23218-1880. If payment is not received within the allotted time, interest will accrue from the original date of assessment.
If you should have any questions regarding this matter, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/29151K
Rulings of the Tax Commissioner