Tax Type
Retail Sales and Use Tax
Description
Computer company pre-production functions.
Topic
Appropriateness of Audit Methodology
Exemptions
Property Subject to Tax
Date Issued
02-19-2002
February 19, 2002
Re: § 58.1-1821 Application Reconsideration: Retail Sales and Use Tax
Dear *****:
This will reply to your letter of December 2, 2001, in which you request a reconsideration of my determination letter of October 29, 2001, issued to your client, ***** (the "Taxpayer"). The appeal in question covers the audit period of May 1996 through April 1999.
The original determination held taxable items used in the Taxpayer's "preflight" department. According to your letter, "preflight" is merely a different term that commercial printers have adopted and entails nothing more than electronic pre-press activities.
The department extended the sales and use tax exemption to "electronic prepress" activities as defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-6020, when this regulation was amended effective July 1, 1994 (copy enclosed). Title 23 VAC 10-210-6020 defines "electronic pre-press" activities as follows:
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- "Electronic pre-press" means any process involved in taking manuscript, conventionally supplied artwork, electronically supplied artwork, electronically supplied keystrokes, and other client materials and formatting these materials into electronic commands so that they can be output as film or paper to image-setting output devices or prepared in such a way that they can be distributed electronically by way of any electronic or magnetic media. It also includes the various proofing steps that are required prior to final output or distribution by way of any electronic or magnetic media.
Based on information furnished by the auditor, the Taxpayer's pre-flight department performs two pre-production functions. First, the Taxpayer has dedicated computers and software used to ensure that customer-provided disks or CDS are properly configured, i.e., proper font size, punctuation, commands, etc. Second, the Taxpayer also has dedicated computers and software in the pre-flight department that are used to format customer-provided information into electronic commands so they may be output as film or paper to image setting output devices. It should be noted that only computers and software dedicated to the proofing of customer-furnished disks and CDS were held taxable in the audit. Computers and software dedicated to the formatting function were considered electronic pre-press by the auditor and not assessed.
Based on the definition of "electronic pre-press" in the regulation cited above, I find that the proofing function of customer-provided materials in the pre-flight department does qualify for the industrial manufacturing exemption. The regulation states that the various proofing steps that take place prior to the electronic transmittal to press qualify for the exemption. For this reason, I will agree to remove the computers and software dedicated to the proofing function from the audit.
If you or your constituent 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
PD/37760K
Rulings of the Tax Commissioner