Tax Type
Retail Sales and Use Tax
Description
Commercial Printer; Manufacturing exemption
Topic
Exemptions
Property Subject to Tax
Date Issued
12-07-2001
December 7, 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 November 1996 through October 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a commercial printing operation that enjoys the industrial manufacturing exemption. The Taxpayer was audited and assessed tax on a number of items that the Taxpayer believes to be tax exempt. Purchases of other items were held taxable in the audit because the Taxpayer did not have adequate documentation at the completion of the audit to prove the items qualified for exemption. The items include doctor blades, software and support services, cabinets and blanket wash.
The Taxpayer has furnished documentation verifying that tax was paid to the vendor on the cabinets; therefore, these items will be removed from the audit. I will address the other contested areas separately.
DETERMINATION
Manufacturing Exemption
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in... manufacturing... products for sale or resale." The term "used directly" is defined in Code of Virginia § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing... process, but not including ancillary activities such as general maintenance or administration."
Interpreting the above statutes, Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2), copy enclosed, provides for the following:
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- Items of tangible personal property which are used directly in manufacturing... are machinery, tools and repair parts therefor, fuel, 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. Convenient or facilitative items... or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing ....
Doctor Blades
As provided above, the definition of "used directly" specifically excludes ancillary activities such as general maintenance. According to the Taxpayer, doctor blades are attached to the presses and are used to remove excess ink during the actual production process. If this is the case, I would agree that the doctor blades are directly used in actual production and qualify for the manufacturing exemption. On the other hand, if the blades are used in a general maintenance function after a production run and not during the actual printing process (as understood by the auditor), the blades are taxable as general maintenance items. I will ask that the auditor review this issue further to determine the actual use of the doctor blades and the appropriate tax treatment.
Software and Support Services
According to the Taxpayer, the software at issue is part of the "Wonderware" system used during the production process. This software works in conjunction with the press to automatically shut down the press when there is a web break (end of roll of paper, or break in the paper).
Generally, hardware and software that interact with the production process and provide some type of control over the process, e.g., automatically shuts down equipment, are considered to be used directly in production and exempt from the tax. Hardware and software that function for the purpose of notifying a line employee to take some type of action, or providing production information for administrative purposes, are considered to be taxable facilitative items.
Based on information furnished to this office by the auditor, the software and support services held in the present audit are used solely to provide information on quality and quantity of work production. This is considered to be a taxable administrative function. Again, I will ask the auditor to review the information supporting the Taxpayer's claim and make the appropriate adjustments (if any) to the audit.
Blanket Wash
Blanket wash is a cleansing agent used to clean the blanket and roller of a printing press. This item was an issue in the previous audit of the Taxpayer and addressed in the department's determination as follows:
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- While the department recognizes that cleansing agents used during the production process by a printing company are exempt (these agents are generally referred to as "blanket wash"), cleansing agents used prior to or after a production run are considered general maintenance items and are not exempt.
The fact that an item is classified as "blanket wash" does not, in and of itself, determine the tax application. The use of the item determines its taxability. In the case of blanket wash, if the blanket wash is used during the production process to clean the rollers, the exemption would apply. However, if the blanket wash is used prior to or after the production process, such use constitutes general maintenance and would be taxable. In this case, the auditor must review the Taxpayer's use of the blanket wash to determine the appropriate tax treatment.
Conclusion
Based on all of the above, the audit will be returned to the ***** District Office for further review and possible revisions. If you should have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner