Tax Type
Retail Sales and Use Tax
Description
Photocopier lease; Charges related to the lease of photocopier; Printer
Topic
Taxability of Persons and Transactions
Date Issued
10-31-1984
October 31, 1984
Re: §58-1118 Application/Sales and Use Tax
Dear ***********
This will reply to your letter of August 30, 1984, in which you submit an application for correction of sales and use tax assessed to ***** as the result of an audit.
FACTS
******** (hereinafter "Taxpayer") is engaged in the printing trade. Printing is performed by the Taxpayer using either a printing press or a high speed electrostatic duplicator (photocopier).
A recent audit of the Taxpayer produced an assessment for the failure to remit the sales and use tax on its purchase of a photocopier for use in its printing operations. The Taxpayer contests this assessment, contending that a photocopier is used directly in an industrial manufacturing process just as a printing press is. Should its photocopier be found to be taxable, the taxpayer alternatively asserts that the gross proceeds upon which the assessment is based should be reduced by finance charges, maintenance fees, and the trade-in value of equipment taken in trade for the photocopier.
DETERMINATION
§ 58-441.6 of the Code of Virginia provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof ...used directly in ...manufacturing ...products for sale or resale."
It is undisputed that the Taxpayer is engaged in manufacturing products for sale or resale regardless of the printing process used. However, the Virginia Supreme Court, in Golden Skillett Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), held that the above statute was intended "to provide exemption for machinery and tools used in ...manufacturing ...products for sale or resale only in the industrial sense, 214 Va. at 278. Therefore, in order for machinery or tools to gain exemption under Virginia Code §58-441.6, two tests must be satisfied. First, the machinery or tools must be an integral part of a process in which products are manufactured for sale or resale and second, the manufacturing process must be industrial in nature.
The department has traditionally considered the operation of printing presses by a printer to be an industrial operation. However, the department has consistently deemed photocopying operations to be non-industrial in nature. Therefore, printing presses used by a printer have been deemed exempt from the sales and use tax while photocopiers have been deemed taxable.
In 1983, the General Assembly amended Virginia Code § 58-441.3(p) to add the following language:
The determination whether any manufacturing ...activity is industrial in nature shall be made without regard to plant size, existence or size of finished product inventory, degree of mechanization, amount of capital investment, number of employees or other factors relating principally to the size of the business. Further, "industrial in nature" shall include, but not be limited to, those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual for 1972...
A review of the Standard Industrial Classification (SIC) Manual reveals that commercial letterpress and screen printers, commercial lithographic printers, and commercial gravure printers are included in code 27 of that volume. However, photocopiers are found in code 73 of the SIC Manual. Therefore, photocopying has not gained exemption from the tax under the 1983 statutory change that broadened the number of manufacturers qualifying for exemptions.
As to your alternative point, Virginia Code §58-441.3(f) defines the term "gross proceeds," upon which the tax on leased property is based, as "the charges made or voluntary contributions received for the lease or rental of tangible personal property." Therefore, the "gross proceeds" of a lease include the total amount received for the lease of tangible personal property, including services that are a part of the lease, with only those deductions provided in Virginia Code §58-441.3(b). Such deductions are "the amount separately charged for labor or services rendered in installing, applying, or remodeling or repairing property sold, finance charges, carrying charges, service charges ...(and) transportation charges separately stated." In addition, the statute provides that "where used articles are taken in trade, or in a series of trades as a credit or part payment on the sale of new or used articles, the tax levied ...shall be paid on the net difference between the ...price of the new or used articles and the credit for the used articles."
The taxpayer asserts that the gross proceeds from its leases of photocopiers should be the cost of the machines only and should not include charges for other services that are a part of the lease. A reading of Virginia Code §§58-441.3(f) and (b) clearly reveals that services that are a part of the lease are generally not exempted from tax. Rather, only specific charges are excludable from the computation of "gross proceeds." Furthermore, a strict construction was applied to the specific deductible charges found in Virginia Code §58-441.3(b) by the Circuit Court of Fairfax County in Lutherville Supply & Equipment Company v. Department (1978). The court found that "an incremental addition to the purchase price... is not excluded from the imposition of the Virginia Sales Tax." Specifically, the court found taxable a "finance charge" added at the time of sale to the value of equipment leased under an option to purchase. Inasmuch as no information has been submitted that would show the inclusion of any deductible charges in the taxpayer's lease payments, I must conclude that "gross proceeds" were correctly computed by the department's auditor.
Therefore, based upon the foregoing, I find no basis for the relief of sales and use tax assessed to the taxpayer. Accordingly, the assessment issued to the taxpayer remains due and payable.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner