04-155 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Camera inspection system /postal software purchases, industrial processing exemption

Topic

Manufacturing Exemption

Date Issued

09-17-2004

September 17, 2004

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ********:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ******** (the "Taxpayer"), for the period April 1999 through March 2002. I apologize for the Department's delay in responding to your letter.

FACTS

The Taxpayer operates a mail shop and prints the majority of the materials it mails for its customers. The Taxpayer is deemed a manufacturer with regard to its printing process. As a result of the Department's audit, the auditor assessed tax on purchases of a camera inspection system and postal software because they are not used directly in the Taxpayer's printing process. The Taxpayer disagrees and believes that the purchases qualify for industrial processing exemption provided in Va. Code § 58.1-609.3(2).

DETERMINATION

Virginia Code § 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale..." (Emphasis added.) The term "used directly" is defined in Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product ... but not including ancillary activities such as general maintenance or administration."

Further, in the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. An exemption, therefore, applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products. This standard established by the Court can also be found in Title 23 of the Virginia Administrative Code (VAC) 10-210-920, the regulation regarding manufacturing: "Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, 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.)

- I will address the contested purchases in light of the above authorities.

Camera Inspection System

In this instance, the camera system is used in conjunction with the printing press. The camera system allows the press operator to view the paper stock as it is being printed without interrupting the operation of the press. You state that without the camera system, the operator would have to continually start and stop the press, which causes waste and inefficiency.

Based on the information presented, I do not agree that the camera system is indispensable to or an immediate part of the printing process. The camera system does not control the press or touch upon the printed product, nor does the camera system make any adjustments to the printed product or independently alert the operator to any potential problems. While I recognize that the camera system makes the Taxpayer's press operation more efficient, it is not used directly in the Taxpayer's printing process and does not qualify for the exemption.

Postal Software

The Taxpayer offers laser personalization of the printed product to its customers. In order to do this, the Taxpayer uses a software system that incorporates a number of programs that perform a number of data processing tasks. In addition to believing that the software is used directly in the production process, the Taxpayer contends that the postal software was deemed exempt in the prior audit.

According to the current auditor's comments, the software includes six different programs. The auditor determined that only one of the programs is used directly in the printing process to drive the laser printers that print the information onto the finished product. The auditor did not apply the tax to this purchase in accordance with Title 23 VAC 10-210-920(C)(2). The remaining programs were held taxable because they provided data processing functions to sort and compile mailing list name and address data into a database to allow the Taxpayer to obtain the best postal rates. In addition, the software printed labels for mail trays and mailbags. Based on the information presented and the definition of "used directly" as it applies to the industrial processing exemption, I agree that the remaining programs are not used directly in the Taxpayer's printing process and the auditor properly applied the tax.

With regard to the prior audit, there is no verifiable proof that the auditor determined that the software is exempt or that it was even raised as an issue. Notwithstanding the prior audit, it has been determined in the current audit that the software is taxable.

Conclusion

Based on the foregoing, there is no basis for correction or revision of the tax assessment at issue. The Taxpayer will receive an updated bill shortly that will include accrued interest. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.

The Code of Virginia section and regulation cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's website, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/41336J

Rulings of the Tax Commissioner