Tax Type
Retail Sales and Use Tax
Description
Printing count system
Topic
Taxability of Persons and Transactions
Date Issued
04-04-1988
April 4, 1988
Re: Virginia Code §58.1-1821 Application
Retail Sales and Use Tax
Dear***************
This is in reply to your letter of August 26, 1987 in which you submit an application for correction of the sales and use tax assessed to ********** as the result of a recent audit.
FACTS
********** (Taxpayer) is engaged in the production of printed matter for sale or resale and as such is entitled to the industrial manufacturing exemptions set forth in Virginia Code §58.1-608.1. A recent audit produced an assessment of sales and use tax on the taxpayer's purchase of an "Auto Count" system. This system is attached to the printing press and is used to supply the press operators with an accurate count of production.
You contend that this system is used directly in the manufacturing process and the cost savings attributable to this machine are critical to the success of the business and therefore qualifies for exemption from the tax.
DETERMINATION
Virginia Code §58.1-608.1 provides an exemption from the sales and use tax for "machinery ... used directly in manufacturing ... products for sale or resale." "Used directly" is defined under Virginia Code §58.1-602.22 as "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."
Virginia Regulation 630-10-63 further defines the term "used directly", noting that "items of tangible personal property which are used directly in manufacturing ... are machinery, tools, and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." (Emphasis added.)
This regulation includes an exemplary listing of the types of items which are taxable and exempt production items. Included, as exempt in this listing, is computer hardware and software used to direct or control production line and/or quality control operations. In addition, this same section of the regulation contrasts this exempt computer hardware and software with taxable computer hardware and software by specifying that, "computer hardware and software used merely to monitor production operations, e.g., computers used to produce production reports, make production information available to plant personnel, monitor the efficiency of production machinery, etc., ... are deemed to be taxable administrative items."
The "Auto Count" system purchased by Taxpayer serves many uses including the counting of printed documents, production of skid tickets and management reports and the counting of waste. However, based upon the information that has been provided to the department, there is no indication that it is "used to direct or control" production line operations.
Based upon the information gathered by the department's auditor and upon the information that you have provided, this system is not used directly in manufacturing products for sale or resale; therefore, its purchase is subject to the tax. Accordingly, I find no basis to adjust the assessment.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner