Tax Type
Retail Sales and Use Tax
Description
Genigraphics image generator system
Topic
Taxability of Persons and Transactions
Date Issued
05-28-1985
May 28, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of March 19, 1985 in which you submit an application for correction of sales and use tax assessed to, ***** as the result of a recent audit.
FACTS
***** ("Taxpayer") is engaged in the production of photographs, slides, and artwork for sale or resale. A recent audit of the taxpayer produced an assessment for the failure to remit the sales and use tax on a Genigraphics Image Generator System used in the composition and production of the taxpayer's products.
The taxpayer contests the imposition of tax upon the Genigraphics system, asserting that Section 58.1-608.1 of the Code of Virginia clearly exempts machinery used directly in the manufacturing of products for sale or resale from the tax. While a similar system was deemed subject to the tax by the Circuit Court of Fairfax County in ***** v. Commonwealth (1978), the taxpayer asserts that an exemption now exists due to statutory changes to former Virginia Code Section 58-441.6.
DETERMINATION
The Virginia Retail Sales and Use Tax Act has since its inception in 1966 contained an exemption from the sales and use tax for various items used in the production of products for sale or resale. Such exemption was found at Section 58-441.6 of the Code of Virginia prior to January 1, 1985 and is now found at Virginia Code Section 58.1-608.1. This exemption from the tax was interpreted by the Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973). The exemption read at the time of the court's opinion as follows:
"The terms 'sale at retail,' lease or rental,' 'distribution,' 'use,' 'storage' and 'consumption' shall not include industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product; nor shall such terms include industrial materials that are coated upon or impregnated into the product at any stage of its processing, manufacture, refining, or conversion for resale; nor shall such terms include machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale; nor shall such terms include materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale.
In interpreting the exemption statute the court noted that:
it is a one-sentence paragraph, its several provisions separated only by semicolons. Its first two provisions exempt industrial materials which enter into the production of, become a component part of, or are coated upon or impregnated into, products processed, manufactured, refined, or converted for sale. Then, pausing only for a semicolon, the paragraph next exempts, among other things, machinery or tools used directly in processing, manufacturing, refining, mining, or conversion of products for sale or resale. Finally, the paragraph exempts certain types of containers and materials used in packaging and labeling personal property for shipment or sale.
Despite the absence of the word "industrial" in the portion of the exemption relating to machinery, tools, etc., as was true with the first two provisions of the exemption, the court opined that the paragraph "must be interpreted as a whole and read as is punctuated" and concluded that "[w]hen so interpreted an read, it is intended...to provide exemption for machinery and tools used in...manufacturing...products for sale or resale only in the industrial sense.
Presently, the statute reads so as to exempt the following:
(a) Industrial materials for future processing, manufacturing, refining, or conversion into articles of
tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product; (b) industrial materials that are coated upon or impregnated into the product at any stage of its processing, manufacture, refining, or conversion for resale; (c) machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale; (d) materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible property for shipment or sale; or (e) equipment, printing or supplies used directly to produce a publication described in subsection 13 whether it is ultimately sold at retail or for resale or distribution at no cost. Machinery, tools and equipment, or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale.
As under the arrangement of the statute previously, the provision relating to machinery, tools, etc. is part of a single sentence and is separated from other provisions of the sentence by semicolons. In addition, the first two provisions of the sentence continue to reference "industrial materials." In fact, the present wording of the sentence is virtually identical to that of the sentence interpreted in Golden Skillet. Accordingly, I must conclude that the proper construction of the present machinery and tools exemption is the same as that given the previous exemption in Golden Skillet.
Nor do I find basis for concluding that the last provision of Virginia Code Section 58.1-608.1 serves to exempt the taxpayer's Genigraphics system from the tax. That provision does state that "[m]achinery... shall be exempt if the preponderance of...(its) use is used directly in...manufacturing...products for sale or resale." However, this provision must be read in conjunction with the rest of the paragraph and not by itself. When read as part of the entire paragraph, it is obvious that the provision merely modifies the exemption provided earlier in the paragraph and does not eliminate the requirement that manufacturing, processing, etc. be industrial in nature. In fact, a review of the legislative history of this provision reveals that it was merely intended to end the practice of prorating the tax when a single machine, tool, or part is used both in an exempt industrial production activity and another taxable activity.
As I see no clear intent on the part of the General Assembly to effect a change in the law relating to machinery, tools, etc. used by manufacturers, I must determine that machinery, tools, etc. used by a manufacturer are exempt only when used in industrial production for sale or resale.
While a 1983 amendment to Virginia Code Section 58.1-602.9 did expand the number and types of business entitled to the industrial exemption, the taxpayer is not among the businesses now deemed industrial. The 1983 amendment provided that the term "industrial in nature" should include, but not be limited to businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual. A review of the SIC Manual reveals that the type of business engaged in by the taxpayer, commercial photography, art, and graphics, is listed in code 73 of that publication. This fact, in addition to the finding of the Fairfax County Circuit Court that similar production activities were nonindustrial, makes clear that the taxpayer is not entitled to an exemption from the tax on its purchase of a Genigraphics system. Therefore, the assessment issued by the department must be considered correct and payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of March 19, 1985 in which you submit an application for correction of sales and use tax assessed to, ***** as the result of a recent audit.
FACTS
***** ("Taxpayer") is engaged in the production of photographs, slides, and artwork for sale or resale. A recent audit of the taxpayer produced an assessment for the failure to remit the sales and use tax on a Genigraphics Image Generator System used in the composition and production of the taxpayer's products.
The taxpayer contests the imposition of tax upon the Genigraphics system, asserting that Section 58.1-608.1 of the Code of Virginia clearly exempts machinery used directly in the manufacturing of products for sale or resale from the tax. While a similar system was deemed subject to the tax by the Circuit Court of Fairfax County in ***** v. Commonwealth (1978), the taxpayer asserts that an exemption now exists due to statutory changes to former Virginia Code Section 58-441.6.
DETERMINATION
The Virginia Retail Sales and Use Tax Act has since its inception in 1966 contained an exemption from the sales and use tax for various items used in the production of products for sale or resale. Such exemption was found at Section 58-441.6 of the Code of Virginia prior to January 1, 1985 and is now found at Virginia Code Section 58.1-608.1. This exemption from the tax was interpreted by the Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973). The exemption read at the time of the court's opinion as follows:
"The terms 'sale at retail,' lease or rental,' 'distribution,' 'use,' 'storage' and 'consumption' shall not include industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product; nor shall such terms include industrial materials that are coated upon or impregnated into the product at any stage of its processing, manufacture, refining, or conversion for resale; nor shall such terms include machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale; nor shall such terms include materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale.
In interpreting the exemption statute the court noted that:
it is a one-sentence paragraph, its several provisions separated only by semicolons. Its first two provisions exempt industrial materials which enter into the production of, become a component part of, or are coated upon or impregnated into, products processed, manufactured, refined, or converted for sale. Then, pausing only for a semicolon, the paragraph next exempts, among other things, machinery or tools used directly in processing, manufacturing, refining, mining, or conversion of products for sale or resale. Finally, the paragraph exempts certain types of containers and materials used in packaging and labeling personal property for shipment or sale.
Despite the absence of the word "industrial" in the portion of the exemption relating to machinery, tools, etc., as was true with the first two provisions of the exemption, the court opined that the paragraph "must be interpreted as a whole and read as is punctuated" and concluded that "[w]hen so interpreted an read, it is intended...to provide exemption for machinery and tools used in...manufacturing...products for sale or resale only in the industrial sense.
Presently, the statute reads so as to exempt the following:
(a) Industrial materials for future processing, manufacturing, refining, or conversion into articles of
tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product; (b) industrial materials that are coated upon or impregnated into the product at any stage of its processing, manufacture, refining, or conversion for resale; (c) machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale; (d) materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible property for shipment or sale; or (e) equipment, printing or supplies used directly to produce a publication described in subsection 13 whether it is ultimately sold at retail or for resale or distribution at no cost. Machinery, tools and equipment, or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale.
As under the arrangement of the statute previously, the provision relating to machinery, tools, etc. is part of a single sentence and is separated from other provisions of the sentence by semicolons. In addition, the first two provisions of the sentence continue to reference "industrial materials." In fact, the present wording of the sentence is virtually identical to that of the sentence interpreted in Golden Skillet. Accordingly, I must conclude that the proper construction of the present machinery and tools exemption is the same as that given the previous exemption in Golden Skillet.
Nor do I find basis for concluding that the last provision of Virginia Code Section 58.1-608.1 serves to exempt the taxpayer's Genigraphics system from the tax. That provision does state that "[m]achinery... shall be exempt if the preponderance of...(its) use is used directly in...manufacturing...products for sale or resale." However, this provision must be read in conjunction with the rest of the paragraph and not by itself. When read as part of the entire paragraph, it is obvious that the provision merely modifies the exemption provided earlier in the paragraph and does not eliminate the requirement that manufacturing, processing, etc. be industrial in nature. In fact, a review of the legislative history of this provision reveals that it was merely intended to end the practice of prorating the tax when a single machine, tool, or part is used both in an exempt industrial production activity and another taxable activity.
As I see no clear intent on the part of the General Assembly to effect a change in the law relating to machinery, tools, etc. used by manufacturers, I must determine that machinery, tools, etc. used by a manufacturer are exempt only when used in industrial production for sale or resale.
While a 1983 amendment to Virginia Code Section 58.1-602.9 did expand the number and types of business entitled to the industrial exemption, the taxpayer is not among the businesses now deemed industrial. The 1983 amendment provided that the term "industrial in nature" should include, but not be limited to businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual. A review of the SIC Manual reveals that the type of business engaged in by the taxpayer, commercial photography, art, and graphics, is listed in code 73 of that publication. This fact, in addition to the finding of the Fairfax County Circuit Court that similar production activities were nonindustrial, makes clear that the taxpayer is not entitled to an exemption from the tax on its purchase of a Genigraphics system. Therefore, the assessment issued by the department must be considered correct and payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner