September 8, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to the letter submitted on behalf of ***** (the “Taxpayer”) seeking correction of the retail sales and use tax assessment issued for the period February 2009 through February 2012. I apologize for the delay in responding to the appeal.
FACTS
The Taxpayer is in the business of providing printing services to its customers at its Virginia locations. The Taxpayer operates two types of print production facilities. The standard print center produces custom print jobs for wholesale and retail sale. The closed production center is used for large-scale and high volume print projects, and supports the Taxpayer's standard print centers.
Relying on Public Document (P.D.) 97-377 (9/18/97), the auditor assessed use tax on equipment purchased exempt of the tax by the Taxpayer and used to provide print services to its customers. Based upon the public document and an on-site tour of the Taxpayer's facilities, the auditor determined the equipment at issue was not used in industrial manufacturing and, therefore, the industrial manufacturing exemption did not apply.
The Taxpayer disputes the tax assessment and maintains that its primary business activity is commercial print production. The Taxpayer asserts that purchases of equipment used in its print production operations are exempt of the tax pursuant to the industrial manufacturing exemption provided in Va. Code § 58.1-609.3 2. The Taxpayer states that its activities fall under Standard Industrial Classification (SIC) code 2759, Commercial Printing. Relying on Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1 and Title 23 VAC 10-210-3010 A and C, the Taxpayer maintains that its print production operations meet the definition of custom printing, and the Taxpayer qualifies as an industrial manufacturer. The Taxpayer states that in a prior Department audit, the industrial manufacturing exemption was applied to its purchases of equipment used in its print production operations. The Taxpayer requests that the transactions for the purchases at issue be removed from the audit.
The Taxpayer further requests a credit in the audit for sales and use tax paid in error on exempt capital purchases. The equipment at issue includes automatic hole punchers, laminators, a paper cutter, a booklet maker, a binder punch, a folder, a binder booklet maker, a driller and a banner printer.
The auditor also assessed use tax in the audit on the purchase of heating, ventilating and air conditioning (HVAC) equipment installed at one of the Taxpayer's Virginia locations. The Taxpayer contends that the HVAC equipment is permanently affixed and incorporated in real property and as such is considered consumed by and taxable to the contractor installing the systems pursuant to Va. Code § 58.1-610 A. The Taxpayer requests that the transactions related to this equipment be removed from the audit.
DETERMINATION
Industrial Manufacturing Exemption
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....” In Golden Skillet Corporation v. Commonwealth, 214 Va. 279, 199 S.E.2d 511 (1973), the Supreme Court of Virginia determined that the exemption provided for in Va. Code § 58.1-609.3 2 applies to establishments manufacturing in the industrial sense only. Virginia Code § 58.1-602 provides, in pertinent part, that the term “industrial in nature” includes, but is not limited to, “those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual (SIC) for 1972 and any supplements issued thereafter.” The Department began using the North American Industry Classification System (NAICS) in 1997 when the SIC was replaced by the NAICS.
Title 23 VAC 10-210-920 A provides further clarification of the exemption statute and states, in pertinent part, that “for a business to obtain the exemption it first must be manufacturing or processing products for sale or resale and secondly, such production must be industrial in nature.” Title 23 VAC 10-210-920 B 1 provides that “Establishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities.”
In P.D. 97-377, the taxpayer was in the business of providing document reproduction and copy services. The taxpayer believed that its business should have been classified as industrial manufacturing and not as a retail copy center. In the audit, the auditor assessed tax on the purchase of a digital printing system and a color copier. Also during the audit, a review of the SIC codes revealed that the taxpayer's business was classified in SIC subgroup 7334, which categorizes businesses engaged in commercial photocopying and duplicating as service providers. It was determined by the Tax Commissioner that the activities provided by this equipment did not satisfy the industrial in nature requirement, and the activities performed by the taxpayer did not enjoy the industrial manufacturing exemption. This decision was supported by the aforementioned authorities and the Virginia Supreme Court decision in Golden Skillet.
SIC Code/NAICS
The Taxpayer states that its business is classified under SIC code 2759, Commercial Printing. Generally, businesses engaged in manufacturing are classified under SIC codes 20 through 39, and are involved in transforming raw materials into useful and marketable products within a factory, plant or mill environment using driven machinery and materials handling equipment. See, P.D. 96-50 (4/19/96). In P.D. 02-30 (3/13/02), the taxpayer operated as a copy center and requested to be classified as an industrial manufacturer. At the time that this request was filed by the taxpayer, the taxpayer was classified under SIC code 7334, businesses engaged in providing services as commercial photocopying and duplicating. The taxpayer was in the business of selling copies and providing various services to its customers. Those services included document enlargements and reductions, diazo printing, photocopying, color copying, lamination, scanning services and bid sets, as well as other services. Based upon an on-site examination of the taxpayer's facilities by the Department, the auditor determined that the taxpayer's services were high technology photocopying processes and were not considered to be industrial manufacturing. In response to the taxpayer's appeal, the Tax Commissioner determined that there was no evidence of industrial activity sufficient to allow for reclassification of the taxpayer's operations as an industrial manufacturer.
Considering the public documents cited above, I find that the Taxpayer's activities are most similar to businesses classified under SIC code 7334, like the taxpayer in P.D. 02-30. Based upon the information provided, it does not appear that the Taxpayer is transforming raw materials into marketable products, nor does it appear that the Taxpayer is performing the types of services that fall under SIC code 2759 or the corresponding NAICS classification, 323111, Commercial Printing. Rather, the Taxpayer is providing photocopying, enlargement, reduction, large scale printing and other services for its retail customers that do not satisfy the industrial in nature requirement and that do not enjoy the industrial manufacturing exemption. The services provided by the Taxpayer are more like those that fall under NAICS classification 561439, Other Business Service Centers (including Copy Shops).
Printing
Title 23 VAC 10-210-3010 A defines custom printing as “the production or fabrication of printed matter in accordance with a customer's order of copy for the customer's use or consumption.” Title 23 VAC 10-210-3010 B states that generally, “The printing of tangible personal property for sale or resale is deemed to be industrial manufacturing,” in accordance with the industrial manufacturing exemption.
Printing, as considered in the regulation, involves the production or fabrication of printed matter, not the reproduction or photocopying of material. Based upon the information presented, I find that the Taxpayer's operations do not amount to custom printing as considered in Title 23 VAC 10-210-3010, and as such do not qualify the Taxpayer's activities for the industrial manufacturing exemption. The Taxpayer is not using the type of machines addressed in Title 23 VAC 10-210-3010 and used by printers to provide services to customers. The determination in P.D. 97-377 is applicable in this instance because the Taxpayer's activities are similar to those of the taxpayer in that public document, i.e., document reproduction and copying services, whose SIC classification was determined by the Tax Commissioner to be SIC code 7334. Accordingly, I find that the Taxpayer is not a printer as considered in the regulation, and the industrial manufacturing exemption granted to printers does not apply in this instance.
Based on the foregoing, the Taxpayer does not qualify for the industrial manufacturing exemption. While the Taxpayer's operations use highly technical equipment, the Taxpayer's activities are not deemed to be industrial in nature as considered in the cited authorities. Additionally, as considered in P.D. 97-377, the Taxpayer's primary activity involves making sales directly to end users for their own use and consumption. Accordingly, the Taxpayer's activities do not satisfy the industrial in nature requirement and do not enjoy the industrial manufacturing exemption. The equipment held taxable in the audit will not be removed from the assessment, and the credits requested for tax paid by the Taxpayer on other similar equipment is denied.
Prior Audit
The Taxpayer states that in the prior Department audit, the industrial manufacturing exemption was allowed on purchases of equipment by the Taxpayer used in its print production operations.
Based on a review of the prior audit of the Taxpayer's records conducted by the Department, it appears possible that equipment used to do large scale printing at issue in the current audit is similar to equipment that may have been purchased and used for similar activities by the Taxpayer during the prior audit period. Furthermore, such equipment was not held taxable in the prior audit because the industrial manufacturing exemption was applied. Accordingly, the Department's audit staff will review the equipment and its use to determine if the industrial manufacturing exemption applies in this instance. For the purposes of this audit only, if it is determined that the exemption applies, the Taxpayer will be given a credit in the audit for sales tax paid at the time the purchase of the equipment was made.
Heating, Ventilating and Air Conditioning Equipment
The Taxpayer maintains that HVAC equipment was erroneously held taxable in the audit. The Taxpayer also contends that during the audit period it paid the tax on the purchase of some HVAC equipment to its vendor at the time the transactions took place. Based upon a review of the audit and the documentation provided, I agree that the HVAC equipment at issue was erroneously included in the audit. The audit will be returned to the appropriate field audit staff to remove these exceptions from the audit. The audit and the audit assessment will be revised accordingly.
The Taxpayer further requests that it be given a credit in the audit for the tax paid to the vendor on purchases of HVAC equipment. Generally, when a taxpayer has remitted tax to a vendor in error, the taxpayer is required to obtain a refund of the erroneously paid tax from the vendor, in accordance with Title 23 VAC 10-210-3040. The determination in P.D 96-358 (12/6/96) provides that the Department prefers to refund the tax through the dealer to prevent a misallocation of the 1% local sales tax. Additionally, in accordance with Va. Code § 58.1-1822, the amount of the refund is limited by the dealer's discount taken by the dealer for properly and timely filing its sales tax returns with the Department. It is for these reasons that refunds of this nature are not included as credits in the audit findings.
Notwithstanding the above, for purposes of this audit only and because the Taxpayer is approaching its next Department audit, the Taxpayer will be given a credit in the audit for the tax paid on the purchase of the HVAC equipment at issue, provided that the documentation supports the Taxpayer's contention that the tax was paid to the dealer. It is my understanding that the invoices at issue were provided during the performance of the Department's audit. However, to ensure that the Department has the necessary documentation, the appropriate field audit staff will contact the Taxpayer. If additional documentation is required, the Taxpayer must provide the documentation within 30 days of the date of contact from the Department's audit staff.
CONCLUSION
The assessment related to the purchases of equipment used by the Taxpayer to provide services to its customers is correct as issued and no change to the assessment is warranted. Additionally, the Taxpayer is not due a credit for taxes paid to vendor on purchases of similar equipment used by the Taxpayer to provide its services. However, in accordance with this determination, equipment used to do large scale printing will be reviewed to determine if the industrial manufacturing exemption applies, and a credit will be given in the audit as provided above. If the exemption applies, a refund of the sales tax paid by the Taxpayer will be issued. Once the revisions to the audit have been made with respect to the HVAC equipment transactions, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/552.P