06-89 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing exemption does not apply to the sale or lease of a photocopiers

Topic

Assessment

Manufacturing Exemption

Date Issued

09-18-2006

September 18, 2006

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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer") seeking correction of the retail sales and use tax assessment issued for the period September 1999 through March 2004. The Taxpayer has paid the assessment in full and seeks a refund of the tax and interest remitted with regard to the sales that are contested in this appeal. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer leases copiers and business machines to its customers. The Department conducted an audit of the Taxpayer's sales and leases to Virginia customers. The Taxpayer contests certain line items on the Sales Exceptions List and submits documentation to support its contention that the items should be removed from the audit. The documentation has been reviewed by the auditor and most of the contested items will be removed from the exceptions list. Items 11 and 20 remain contested and are addressed below.

DETERMINATION

Virginia Code § 58.1-612 A requires all dealers to collect and remit the retail sales and use tax on all sales or leases of tangible personal property. Virginia Code § 58.1-623 A provides that "[a]II sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter." Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A further clarifies that a certificate that is incomplete, invalid, infirm, or inconsistent on its face is never acceptable. Additionally, Title 23 VAC 10-210-280 B states that "[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate."

Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for certain types of tangible personal property used directly in an industrial manufacturing process. Virginia Code § 58.1-602 defines the term "used directly" as those activities that are an integral part of the production of a product, but does not include ancillary activities such as general maintenance or administration.

Virginia Code § 58.1-609.3 5 exempts from the retail sales and use tax "[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." Title 23 VAC 10-210-3072 provides a list of taxable and exempt items used in research activities. Copy machines are listed as taxable.

Virginia Code § 58.1-609.3 2 exempts from the retail sales and use tax "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale."

Line Items 11 and 20

Line item 11 represents the charge for a photocopier leased to the Taxpayer's customer. The Taxpayer's customer presented Form ST-11, claiming the manufacturing exemption, the research and development exemption, and the exemption for materials used for packaging tangible personal property for shipment or sale. The certificate indicates that the customer is the operator of a manufacturing business. The Taxpayer maintains that the certificate was timely and properly completed and accepted in good faith at the time of the sale. Therefore, the Taxpayer contends that it should not be held responsible for the untaxed sale.

Line item 20 represents the charge for a photocopier leased to another customer. The Taxpayer's customer presented Form ST-11, claiming the research and development exemption. The certificate indicates that the customer is an operator of a research business. The Taxpayer maintains that it accepted the customer's timely and properly completed exemption at the time of the sale, and it should not be held responsible for the untaxed sale.

Based on the information provided, the Taxpayer accepted these exemption certificates in good faith at the time the equipment was leased to its customers. Therefore, the Taxpayer will not be held liable for the tax due on these transactions. Line items 11 and 20 will be removed from the exceptions list.

The Taxpayer should be aware that the exemptions asserted by its customers do not apply to the lease of the photocopiers at issue. Pursuant to Va. Code §§ 58.1-609.3 2 and 58.1-602, the manufacturing exemption does not apply to the sale or lease of a photocopier because a photocopier is an office machine that is not an integral part of the production of a product and is not used directly in manufacturing.

Additionally, the research and development exemption provided in Va. Code § 58.1-609.3 5 does not apply to the sale or lease of a photocopier because a photocopier is not used directly and exclusively in basic research and development. In fact, Title 23 VAC 10-210-3072 lists copy machines as being taxable.

Finally, the packaging exemption found in Va. Code § 58.1-609.3 2 clearly would not apply to the sale or lease of a photocopier because a photocopier is not a form of packaging material.

Collection of the tax

With regard to your argument that the Taxpayer should not be responsible for the tax assessed on the transactions at issue, Va. Code § 58.1-612 legally requires the dealer to collect and remit the sales tax on all sales or leases of tangible personal property. While the tax is the legal debt of the purchaser, it is well established that the Department may proceed against either the retailer or the purchaser for payment of the tax liability. See Public Document 98-163 (10/21/98). In this instance, however, the Taxpayer will not be held liable for the tax assessed for the reasons listed above.

Remaining Line Items

Based on the documentation provided and reviewed by the audit staff, the following line items will also be removed from the Sales Exceptions List: 1-4, 7-10, 13, 14, 16, 17, 19, 21, 23-25, 27 and 28. The dollar amount for line item 18 will be changed to the correct amount: *****.

The audit staff will make all the adjustments noted above. The Taxpayer will receive a refund with interest based on these adjustments.

The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        
        Tax Commissioner

AR/55944P

Rulings of the Tax Commissioner