Tax Type
Retail Sales and Use Tax
Description
Computer and related equipment used in processing operations
Topic
Appropriateness of Audit Methodology
Collection of Delinquent Tax
Penalties and Interest
Date Issued
01-01-1984
See date
Re: §58-1118 Application/Sales and Use Tax
Dear **************************
This will refer to your meeting of August 18, 1983 with members of my staff in which-you submitted additional information and a request for reexamination of my July 21, 1983 determination with respect to sales and use tax assessed to ******* as the result of an audit.
An audit of******** (hereinafter****** ) produced an assessment for failure to remit the sales and use tax on its purchase of a computer and related equipment used in its processing operations at its Plant.
***** contests the imposition of the tax upon its computer purchase, asserting that the items purchased were used directly in its processing operations at ******* Based upon information submitted by ****** its computer is used in each of the six phases of its ***** processing operation. These production phases and the use of the computer in each are set forth below:
********* employs one computer, nineteen terminals, and other related accessories at its***** plant. estimates that a least two- thirds of its computer's memory is devoted to processing activities as are twelve of its computer terminals.
As noted in my previous determination, § 58-441.6 of the Code of Virginia exempts from the sales and use tax "machinery or tools... fuel, power, energy, or supplies, used directly in processing." The same statute also provides an exemption for "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale." Also, as noted previously, Virginia Code § 58-441.3(p) provides that the word "processing includes "equipment and supplies used for production line testing and quality control."
To determine whether ******** computer and accessories are exempt from the tax, we must determine whether such items are used directly in processing or in the packaging of***for shipment or sale.
As previously noted, Virginia Code § 58-441.3(q) defines the term "used directly" as referring "to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including ancillary activities such as general maintenance or administration." The Virginia Supreme Court also addressed the meaning of the term "used directly" in Common-wealth v. Community Motor Bus, 214 Va. 155, 198 S.E. 2d 619 (1973), noting a two-pronged test to determine the existence of the exemption:
The court went on to note that under the above test, "convenient or facilitative items are, of course, not exempt" and "[m]ore important, items which are essential to operation of a business but not an immediate part of actual production of tangible personal property... are not exempted because essentially itself would exempt nearly all items in contravention of the legislature's evident intent." 214 Va. at 158.
Accordingly, we must determine whether ****** computer and accessories are exempt from the tax in light of the foregoing statutes and judicial interpretations. Below, I shall list the six production phases of **** plant and the taxable or exempt usage of the computer and accessories in each:
Based upon our review above, I must continue to hold that computer and accessories are not, for the most part, used in an exempt manner within **** plant. However, certain functions performed by computer are integral parts of processing operations Consequently, I find that a partial exemption is available to***** based upon the amount of time its computer and accessories are used in the exempt activities noted above to the total time such computer and accessories are used in all production and non-production activities.
The instant assessment will be revised upon the submittal by ***** of the percentages of exempt and nonexempt use of its computer. A response within sixty days would be appreciated.
Sincerely,
W. H. Forst
State Tax Commissioner
October 20, 1983
Re: §58-1118 Application/Sales and Use Tax
Dear **************************
This will refer to your meeting of August 18, 1983 with members of my staff in which-you submitted additional information and a request for reexamination of my July 21, 1983 determination with respect to sales and use tax assessed to ******* as the result of an audit.
FACTS
An audit of******** (hereinafter****** ) produced an assessment for failure to remit the sales and use tax on its purchase of a computer and related equipment used in its processing operations at its Plant.
***** contests the imposition of the tax upon its computer purchase, asserting that the items purchased were used directly in its processing operations at ******* Based upon information submitted by ****** its computer is used in each of the six phases of its ***** processing operation. These production phases and the use of the computer in each are set forth below:
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- Scheduling - customer specifications as to the grade and quality of**** to be processed are entered into the computer prior to each production run and are made available to production personnel via display terminals (or CRT's). The computer does not "control" any production machinery.
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- Blending - computer terminals are used to access the correct amounts and grades of****** to be used in a production run, monitor the percentages of ***** used (calculated on an on-line basis by the computer), and track the utilization of raw materials inventory.
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- Ordering - the computer calculates the results of moisture tests performed by***** quality control laboratory which are made available to production personnel via computer terminals.
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- Thrashing - the computer is used to calculate the results of degradation tests performed in quality control laboratory, the results of which are made available via computer terminals to plant personnel.
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- Redrying - the computer is used to calculate the results of final moisture tests performed by quality control laboratory which are made available to production personnel via computer terminals.
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- Prizing - terminals and weigh scales used in the packaging area of****** plant are tied directly into the computer. As soon as finished***** is packaged, the computer assigns each unit an identifying bar code number and records the weight and temperature of the production unit. If a production unit is up to quality control specifications for weight and temperature, the computer prints a packing label for the unit.
********* employs one computer, nineteen terminals, and other related accessories at its***** plant. estimates that a least two- thirds of its computer's memory is devoted to processing activities as are twelve of its computer terminals.
DETERMINATION
As noted in my previous determination, § 58-441.6 of the Code of Virginia exempts from the sales and use tax "machinery or tools... fuel, power, energy, or supplies, used directly in processing." The same statute also provides an exemption for "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale." Also, as noted previously, Virginia Code § 58-441.3(p) provides that the word "processing includes "equipment and supplies used for production line testing and quality control."
To determine whether ******** computer and accessories are exempt from the tax, we must determine whether such items are used directly in processing or in the packaging of***for shipment or sale.
As previously noted, Virginia Code § 58-441.3(q) defines the term "used directly" as referring "to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including ancillary activities such as general maintenance or administration." The Virginia Supreme Court also addressed the meaning of the term "used directly" in Common-wealth v. Community Motor Bus, 214 Va. 155, 198 S.E. 2d 619 (1973), noting a two-pronged test to determine the existence of the exemption:
-
- (1) whether the item is indispensable to actual production of tangible personal property... and
-(2) whether the item is primarily used or consumed immediately in production of tangible personal property. 214 Va. at 158.
- (1) whether the item is indispensable to actual production of tangible personal property... and
The court went on to note that under the above test, "convenient or facilitative items are, of course, not exempt" and "[m]ore important, items which are essential to operation of a business but not an immediate part of actual production of tangible personal property... are not exempted because essentially itself would exempt nearly all items in contravention of the legislature's evident intent." 214 Va. at 158.
Accordingly, we must determine whether ****** computer and accessories are exempt from the tax in light of the foregoing statutes and judicial interpretations. Below, I shall list the six production phases of **** plant and the taxable or exempt usage of the computer and accessories in each:
-
- Scheduling - the entry of customer specifications and other information into the computer for access by plant personnel is an administrative function. Accordingly, the use of the computer and accessories in this phase is taxable.
-
- Blending - for the reason noted above, the use of the computer and accessories to provide plant personnel assess to production in-formation and in the tracking of raw materials inventory is taxable. The computer and terminals are used directly in exempt quality control operations though when used to monitor percentages of ***** used in production operations.
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- Ordering - the calculation by the computer of moisture test results in ****** quality control laboratory is an exempt production activity; however, providing the results of such tests to plant personnel via computer terminals is an administrative activity and the use of the computer and terminals for this purpose is taxable.
Thrashing - the computer is used in exempt quality control activities when used to calculate the results of degradation tests; however, making the results of such tests available to plant personnel via computer terminals is a taxable activity.
- Ordering - the calculation by the computer of moisture test results in ****** quality control laboratory is an exempt production activity; however, providing the results of such tests to plant personnel via computer terminals is an administrative activity and the use of the computer and terminals for this purpose is taxable.
-
- Redrying - the calculation by the computer of moisture test results in ***** quality control laboratory is an exempt production activity; however, providing the results of such tests to plant personnel via computer terminals is an administrative activity and the use of the computer and terminals for this purpose is taxable.
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- Prizing - the use of the computer terminals, and light pen scanners to assign bar code identification numbers is a taxable administrative activity; however, equipment used to measure the temperature and weight of finished products and relay such information to the computer and the computer itself when collating such information are used in exempt quality control activities. As noted previously though, the relay of such information via terminals to plant personnel is a taxable function. We also find the production of packing labels by the computer and related accessories to be an exempt processing activity.
Based upon our review above, I must continue to hold that computer and accessories are not, for the most part, used in an exempt manner within **** plant. However, certain functions performed by computer are integral parts of processing operations Consequently, I find that a partial exemption is available to***** based upon the amount of time its computer and accessories are used in the exempt activities noted above to the total time such computer and accessories are used in all production and non-production activities.
The instant assessment will be revised upon the submittal by ***** of the percentages of exempt and nonexempt use of its computer. A response within sixty days would be appreciated.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner