Tax Type
Retail Sales and Use Tax
Description
Flooring, floor supports and related items used directly in manufacturing furniture
Topic
Exemptions
Date Issued
08-12-2004
August 12, 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 Department's retail sales and use tax audit assessment issued to ********* (the "Taxpayer") for the period March 1998 through March 2001. I apologize for the delay in the Department's response. I note that the assessment has been paid in full.
FACTS
The Taxpayer is a furniture manufacturer. During the audit period, the Taxpayer built a new manufacturing facility. An audit by the Department resulted in the assessment of additional tax, penalty and interest. The Taxpayer disagrees with the audit results, stating there are items that have been assessed tax in error. I will address each of the issues separately.
DETERMINATION
Conveyor Flooring
You contend that conveyor flooring, floor supports and related items are part of a conveyor system used directly in manufacturing furniture. Therefore, you believe these items qualify for the manufacturing exemption under Va. Code § 58.1-609.3(2).
Virginia Code § 58.1-609.3(2)(iii) exempts from the retail sales and use tax machinery, tools, and repair parts therefor, fuel, power, energy, or supplies used directly in manufacturing products for sale or resale. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 explains that the exemption applies to the specified items that are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. It further provides that "convenient or facilitative items . . . such as . . . special flooring . . . which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing" and, therefore, do not qualify for exemption.
Based on the information provided, the flooring, supports and related items at issue (as explained in exhibits G and H of your letter) provide access to the Taxpayer's conveyor system, but they are not used directly in the production process. Therefore, the manufacturing exemption is not applicable, and the tax is properly assessed on these items.
Training (Exhibits D and E)
Prewritten computer software delivered in tangible form is regarded as tangible personal property, and the sale or lease of such software in Virginia is subject to the sales and use tax. The basis for the tax is the total charge for the product, including all services that are a part of the sale or lease. Inasmuch as the provision of training and consulting services and seminars involves only the provision of services, such transactions usually are not taxable. However, when the charge for such services is bundled in the price of tangible personal property sold or leased, the tax applies to the total charge without any deduction for the costs of training, consultation, or providing seminars. Unless training or other such specific services are separately negotiated under a separate contract, there is no basis for an adjustment of the audit. See Public Document 03-31 (4/9/03), which explains in more detail the application of the retail sales and use tax to software training services.
In light of the foregoing, the training provided in another state and purchases of training that was contracted for separately from software purchases are not subject to the tax. The audit will be revised accordingly.
Software Modifications
The Taxpayer purchased canned software and contends there were modifications to the software. You believe that charges for the modification labor should be exempt pursuant to Va. Code § 58.1-609.5(6), which exempts an amount separately stated for labor or services rendered in connection with the modification of prewritten software.
The auditor noted that modification labor was not separately stated on the invoices at issue. Without such detail, the services at issue (exhibit C) are considered to be rendered in connection with the sale of tangible personal property and are included in the taxable sales price. I note that the Department's auditor previously requested information from the Taxpayer to show the separate charges for modification labor, but none was provided. Therefore, there is no basis for any removal of these amounts from the audit assessment.
Capital Improvements
This issue relates to installation labor not separately stated (exhibits F & G). The Taxpayer contends that the tangible personal property became realty, as it was installed by a using and consuming contractor who would have been liable for the payment of the tax. However, the Taxpayer's internal documents classified the property as equipment rather than realty. Consequently, based on available information, the auditor treated the purchase of the items at issue as purchases of tangible personal property. The auditor properly assessed tax only on those invoices where labor was included in lump sum installation and project management amounts.
Forklifts (Exhibit I)
A review of the audit report indicates that forklifts were not included in the Department's assessment. Therefore, there is no need to address this issue.
Asset Overpayments and Expense Overpayments (Exhibits J and K)
The Taxpayer requests a refund of taxes paid on equipment and supplies that it states are used directly in manufacturing or are otherwise exempt of the tax.
The Department will honor separate requests for refunds of use taxes that the Taxpayer accrued and remitted directly to the Department on purchases of tangible personal property that qualifies for an exemption. However, such refunds are subject to a three-year statute of limitations. In this instance, for accruals and payment of the tax, and based on the date of the Taxpayer's letter (which is the initial request for refund), the imposition of the statute of limitations prevents a refund from being made for such accruals prior to November 1, 1999. Based on the information available in Exhibit K, all taxes were accrued and paid prior to this date. Accordingly, the statute of limitations for requesting a refund of taxes paid on the items listed expired prior to the date of the Taxpayer's letter, and there is no refund available for these amounts.
In regard to sales taxes erroneously paid to vendors, the Department generally prefers to refund the tax through the dealer because of the sales tax computations involving the 1 percent local sales tax and the dealer's discount. Consequently, the Taxpayer should present its request for refund directly to its vendors. If this is not practical because a vendor is no longer in business or a vendor does not cooperate with the refund request, the Taxpayer should contact the Department. Any request for refund must be made within the three-year statute of limitations.
Conclusion
The audit will be revised to remove the tax assessed on charges for software training provided outside Virginia and training specifically contracted for separately from software purchases. A refund of the tax paid on these items will be mailed to the Taxpayer. In all other respects, the Department's assessment is correct.
The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, please contact ******** of the Department's Office of Policy and Administration, Appeals and Rulings, at *********@tax.state.va.us or at *********.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/44182Q
Rulings of the Tax Commissioner