05-2 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Imaging process industrial manufacturing/fabricator

Topic

Manufacturing Exemption

Date Issued

01-19-2005

Supersedes PD 87-8

January 19, 2005

Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in reply to your letter in which you request a ruling on the application of the industrial manufacturing exemption to the imaging activities of your client (the "Company"). I apologize for the delay in responding to your letter.

FACTS

The Company maintains a facility in Virginia and is engaged primarily in imaging paper documents and microfiche provided by its customers on to compact discs (CDs) and tapes. The Company images the source document into an electronic file format. The scanned images are coded and indexed for retrieval purposes. The image is then "burned" onto the CD or tape using a laser process. The Company believes that its imaging process constitutes industrial manufacturing and, therefore, the machinery, tools, supplies and power used directly in this process qualify for exemption.

RULING

Virginia Code § 58.1-609.3 2(iii) provides an exemption from the retail 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 . . . ."

The regulation regarding the manufacturing exemption in Title 23 of the Virginia Administrative Code (VAC) 10-210-920 provides in subsection (A)(7) that in order for a business to obtain the exemption, it must (1) be manufacturing or processing products for sale or resale, and (2) its production must be "industrial in nature." Subsection (B)(1) of the regulation states, "industrial manufacturers include establishments engaged in the mechanical or chemical transformation of materials or substances into new products."

In this instance, the Company provides a tangible product and coding and indexing services. In determining the application of the sales and use tax to transactions that involve both the rendition of services and tangible personal property, we must apply the "true object" test set out in Title 23 VAC 10-210-4040. The objective of the Company's customer is to obtain images of its documents on a tangible medium. As such, the Company is clearly engaged in providing a tangible product for retail sale. Therefore, the Company meets the first requirement for exemption.

I do not agree, however, that the Company's imaging process is industrial in nature. I base my conclusion on the rulings of the Tax Commissioner in Public Documents (P.D.) 86-73 (4/22/86) and 89-320 (11/20/89), cited by the Company to support its position.

Both P.D. 86-73 and P.D. 89-320 address the issue of photo processing. Prior to these rulings, the Tax Commissioner determined that photo processing constitutes industrial processing when performed by a business primarily engaged in photo processing of customer provided film. The Tax Commissioner's ruling is based on the opinions in Commonwealth v. Orange-Madison Corp, 220 Va. 655, 261 S.E. 2d 532 (1980) and Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973) and applied in the case of both rulings.

The Company's imaging process does not result in the creation of a new product, as is the case in the photo processing of film. While the Company's process in this instant may provide its customers with new search capabilities regarding the source documents, such documents constitute the final product (after imaging) with only a change in form and not content.

Nor do I find that a new product is created in the case of P.D. 87-8 (1/15/87), also cited by the Company to support its position. In that case, the Tax Commissioner determined that a taxpayer's "copying" of documents or information provided by its customers on to microfiche involved the process of printing, which is deemed industrial manufacturing in accordance with Title 23 VAC 10-210-3010. The ruling in P.D. 87-8 is not consistent with subsequent rulings issued by the Tax Commissioner, and the ruling issued today supersedes the policy set out in P.D. 87-8.

I find further that the Company is engaged in converting data contained in one medium (paper document and microfiche) to that of another medium (CD or tape). The Department has previously determined such conversion activities constitute fabrication, which is defined in Title 23 VAC 10-210-560 as "[a]n operation which changes the form or state of tangible personal property." As a fabricator, the Company must pay the tax on its purchases of machinery, tools, supplies and power used in its imaging process. The Company may purchase for resale the CDs and tapes sold to its customers.

Public Document 96-222 (9/11/96) supports my decision. In that instance, the taxpayer provided a service called "CD archiving" that involved "burning" data contained on a tape provided by the customer to a CD for use as a storage device. The taxpayer also provided software needed to use the CD to the customer. The Tax Commissioner determined that the taxpayer was engaged in the conversion of data, which constituted taxable fabrication.

The Code of Virginia section, regulations and public documents cited are available on-line in the Tax Policy Library of the Department's website, located at www.policylibrary.tax.virginia.gov. If you have any questions regarding this ruling, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/40018J

Rulings of the Tax Commissioner