Tax Type
Retail Sales and Use Tax
Description
Newsgathering and publication; Computers and software
Topic
Exemptions
Property Subject to Tax
Date Issued
03-21-2001
March 21, 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 assessments issued to ***** ("Taxpayer #1") and ***** ("Taxpayer #2"), for the period of September 1995 through August 1998. I apologize for the delay in responding to your appeal.
FACTS
Taxpayer #1
Taxpayer #1, which has various subsidiaries both inside and outside Virginia, has historically purchased computer hardware and software on behalf of its subsidiaries. Taxpayer #1 makes these purchases for several reasons, including: i) consistency of hardware and software among subsidiaries, ii) maximum advantage of volume purchase discounts, and iii) to utilize the expertise of Taxpayer #1's information technology group to procure and configure the equipment for subsidiary groups. For the most part, all computers were delivered to Taxpayer #1's Virginia headquarters, where the software was installed and the hardware configured to operate on the network used by Taxpayer #1 and subsidiaries. Taxpayer #1 believes that the computer hardware and software were exempt purchases for resale to its subsidiaries. The auditor assessed tax on the hardware and software based on the fact that Taxpayer #1 made first use of the computers in Virginia when it installed software and configured the hardware to achieve uniformity.
Taxpayer #2
During the audit period, Taxpayer #2 upgraded its computer system ***** (the "System"). The System consists of computer hardware and software, printers, and various other hardware components. The System is an integrated front-end newsgathering and pagination system designed to streamline Taxpayer #2's publication process. The purpose of acquiring the System was to integrate Taxpayer #2's production process with its front-end newsgathering function. This resulted in the elimination of some of the traditional pre-press activities, i.e., manually typesetting, cutting and pasting components into a page layout. Taxpayer #2 believes the entire System qualifies for the sales tax exemption provided for production equipment in Code of Virginia § 58.1-609.3(2)(v).
DETERMINATION
Taxpayer#1
In the present situation, Taxpayer #1 purchased all computer equipment in bulk, both hardware and software, for distribution to subsidiaries both inside and outside Virginia. Prior to shipping the computer equipment to its subsidiaries, Taxpayer #1 configured the computers to ensure uniformity between all subsidiaries and the parent. Taxpayer #1 claims that it purchased the computers and related equipment for resale to its subsidiaries; therefore, such purchases are purchases for resale and should be exempt from the tax.
Code of Virginia § 58.1-602 defines the term "use" to mean, "the exercise of any right or power over tangible personal property incident to ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Based on the facts of this case, it is clear that Taxpayer #1 exercised a right or power over the tangible personal property in question when it received and configured the equipment to conform to systems used throughout the corporation. This being the case, it must now be determined if Taxpayer #1 purchased the property in question for resale.
In order to make purchases tax exempt for resale, a person must be a registered Virginia dealer and hold a certificate of registration for the collection and remittance of tax to the Commonwealth. In the alternative, a person must be a retailer, a wholesaler or a manufacturer of tangible personal property and furnish proper documentation to demonstrate it is entitled to make purchases for resale.
The department's records show that Taxpayer #1 does not hold a certificate of registration for the collection and remittance of the sales tax. While Taxpayer #1 is registered for the remittance of consumer use tax on taxable purchases when the dealer does not collect the tax at the time of purchase, this cannot be construed as sufficient authority to make purchases exempt of the tax. Furthermore, Taxpayer #1 is not a retailer, wholesaler or manufacturer of tangible personal property. Due to the fact that there is no evidence that Taxpayer #1 is entitled to the resale exemption and it made first use of the property in Virginia, I find that the computer equipment was properly held taxable in the audit.
Taxpayer #2
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 § 58.1-609.3(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." Taxpayer #2 qualifies for the exemption provided above as the publisher of an exempt publication.
In interpreting the above exemption, 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 or resale 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.]
Based on information provided to me by members of my staff who toured Taxpayer #2's facility, the System at issue in this audit serves a dual purpose with equipment dedicated to each function. The System consists of computers, software, and monitors used by reporters in the newsgathering function, i.e., writing, reporting, and editing, and also computers, software, and monitors used in electronic pre-press activities, i.e., pagination, typesetting.
It has been the longstanding policy of the department that traditional newsgathering functions are taxable pre-press activities and do not qualify for the sales and use tax exemption afforded to newspaper publishers. However, VAC 10-210-6020, copy enclosed, addresses the department's position with respect to "typesetting" and "electronic pre-press" as they relate to the publishing industry and provide that such functions qualify for the industrial manufacturing exemption provided under Code of Virginia § 58.1-609.3(2).
With the advent of new innovative technology, the manner in which companies conduct business has changed significantly over the course of the last ten years, including the manufacturing and printing industries. Typesetting and pagination functions, which traditionally had been done by hand at the production site, may now be conducted electronically from virtually anywhere. This being the case, the department has had to review its policies in order to ensure that technological advances do not override the intent of the statute and regulations.
Based on all of the above, I find that the computers, software, and monitors used solely to perform typesetting and pagination functions would qualify for the industrial manufacturing exemption, while those computers, software, and monitors used for reporting, newsgathering, and editing would remain taxable. This determination is consistent with the department's ruling in Public Document (P.D.) 00-192 (10/17/00), copy enclosed.
It is pointed out in the auditor's comments that eventually the two systems may become integrated and their capabilities expanded to perform 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 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 nonexempt activities. Likewise, the item will be totally exempt from the tax if the preponderance of its use is in exempt production activities.
Once Taxpayer #2's System becomes totally integrated, all future acquisitions of equipment must be analyzed to determine the proper tax application in accordance with the preponderance of use rule set forth above. There would be no credit for taxes paid on taxable equipment currently in use as the department employs the "first use" rule in determining tax application.
An auditor from the ***** will contact Taxpayer #2 to make any adjustment necessary to comply with this determination. If you should have any questions, please contact **** in the Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26427K
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 assessments issued to ***** ("Taxpayer #1") and ***** ("Taxpayer #2"), for the period of September 1995 through August 1998. I apologize for the delay in responding to your appeal.
FACTS
Taxpayer #1
Taxpayer #1, which has various subsidiaries both inside and outside Virginia, has historically purchased computer hardware and software on behalf of its subsidiaries. Taxpayer #1 makes these purchases for several reasons, including: i) consistency of hardware and software among subsidiaries, ii) maximum advantage of volume purchase discounts, and iii) to utilize the expertise of Taxpayer #1's information technology group to procure and configure the equipment for subsidiary groups. For the most part, all computers were delivered to Taxpayer #1's Virginia headquarters, where the software was installed and the hardware configured to operate on the network used by Taxpayer #1 and subsidiaries. Taxpayer #1 believes that the computer hardware and software were exempt purchases for resale to its subsidiaries. The auditor assessed tax on the hardware and software based on the fact that Taxpayer #1 made first use of the computers in Virginia when it installed software and configured the hardware to achieve uniformity.
Taxpayer #2
During the audit period, Taxpayer #2 upgraded its computer system ***** (the "System"). The System consists of computer hardware and software, printers, and various other hardware components. The System is an integrated front-end newsgathering and pagination system designed to streamline Taxpayer #2's publication process. The purpose of acquiring the System was to integrate Taxpayer #2's production process with its front-end newsgathering function. This resulted in the elimination of some of the traditional pre-press activities, i.e., manually typesetting, cutting and pasting components into a page layout. Taxpayer #2 believes the entire System qualifies for the sales tax exemption provided for production equipment in Code of Virginia § 58.1-609.3(2)(v).
DETERMINATION
Taxpayer#1
In the present situation, Taxpayer #1 purchased all computer equipment in bulk, both hardware and software, for distribution to subsidiaries both inside and outside Virginia. Prior to shipping the computer equipment to its subsidiaries, Taxpayer #1 configured the computers to ensure uniformity between all subsidiaries and the parent. Taxpayer #1 claims that it purchased the computers and related equipment for resale to its subsidiaries; therefore, such purchases are purchases for resale and should be exempt from the tax.
Code of Virginia § 58.1-602 defines the term "use" to mean, "the exercise of any right or power over tangible personal property incident to ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." Based on the facts of this case, it is clear that Taxpayer #1 exercised a right or power over the tangible personal property in question when it received and configured the equipment to conform to systems used throughout the corporation. This being the case, it must now be determined if Taxpayer #1 purchased the property in question for resale.
In order to make purchases tax exempt for resale, a person must be a registered Virginia dealer and hold a certificate of registration for the collection and remittance of tax to the Commonwealth. In the alternative, a person must be a retailer, a wholesaler or a manufacturer of tangible personal property and furnish proper documentation to demonstrate it is entitled to make purchases for resale.
The department's records show that Taxpayer #1 does not hold a certificate of registration for the collection and remittance of the sales tax. While Taxpayer #1 is registered for the remittance of consumer use tax on taxable purchases when the dealer does not collect the tax at the time of purchase, this cannot be construed as sufficient authority to make purchases exempt of the tax. Furthermore, Taxpayer #1 is not a retailer, wholesaler or manufacturer of tangible personal property. Due to the fact that there is no evidence that Taxpayer #1 is entitled to the resale exemption and it made first use of the property in Virginia, I find that the computer equipment was properly held taxable in the audit.
Taxpayer #2
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 § 58.1-609.3(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." Taxpayer #2 qualifies for the exemption provided above as the publisher of an exempt publication.
In interpreting the above exemption, 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 or resale 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.]
Based on information provided to me by members of my staff who toured Taxpayer #2's facility, the System at issue in this audit serves a dual purpose with equipment dedicated to each function. The System consists of computers, software, and monitors used by reporters in the newsgathering function, i.e., writing, reporting, and editing, and also computers, software, and monitors used in electronic pre-press activities, i.e., pagination, typesetting.
It has been the longstanding policy of the department that traditional newsgathering functions are taxable pre-press activities and do not qualify for the sales and use tax exemption afforded to newspaper publishers. However, VAC 10-210-6020, copy enclosed, addresses the department's position with respect to "typesetting" and "electronic pre-press" as they relate to the publishing industry and provide that such functions qualify for the industrial manufacturing exemption provided under Code of Virginia § 58.1-609.3(2).
With the advent of new innovative technology, the manner in which companies conduct business has changed significantly over the course of the last ten years, including the manufacturing and printing industries. Typesetting and pagination functions, which traditionally had been done by hand at the production site, may now be conducted electronically from virtually anywhere. This being the case, the department has had to review its policies in order to ensure that technological advances do not override the intent of the statute and regulations.
Based on all of the above, I find that the computers, software, and monitors used solely to perform typesetting and pagination functions would qualify for the industrial manufacturing exemption, while those computers, software, and monitors used for reporting, newsgathering, and editing would remain taxable. This determination is consistent with the department's ruling in Public Document (P.D.) 00-192 (10/17/00), copy enclosed.
It is pointed out in the auditor's comments that eventually the two systems may become integrated and their capabilities expanded to perform 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 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 nonexempt activities. Likewise, the item will be totally exempt from the tax if the preponderance of its use is in exempt production activities.
Once Taxpayer #2's System becomes totally integrated, all future acquisitions of equipment must be analyzed to determine the proper tax application in accordance with the preponderance of use rule set forth above. There would be no credit for taxes paid on taxable equipment currently in use as the department employs the "first use" rule in determining tax application.
An auditor from the ***** will contact Taxpayer #2 to make any adjustment necessary to comply with this determination. If you should have any questions, please contact **** in the Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26427K
Related Documents
Rulings of the Tax Commissioner