Tax Type
Retail Sales and Use Tax
Description
Early installation bonus; Sales price
Topic
Taxability of Persons and Transactions
Date Issued
08-31-1989
August 31, 1989
Re: §58.1-1821 Application/ Sales and Use Tax
Dear******************
This will reply to your letter of April 20, 1989 seeking correction of a sales and use tax assessment issued to ********* (taxpayer), for the period December, 1987 through December, 1988.
FACTS
In connection with its nationwide direct mail order business, the taxpayer was recently assessed the tax on a bonus paid for the early installation of tilt tray sorting equipment, and on its purchase of certain monogramming machinery used to customize tangible personal property, such as stationery, pencils, etc. The taxpayer contests the assessment on the grounds that the early installation bonus represented a charge for installation labor exempt from the tax under Virginia Code §58.1 -608(2), and that the monogramming machinery qualifies for tax exemption since it is used directly in a manufacturing or processing operation.
DETERMINATION
Virginia Code §58.1-603(1) imposes the sales tax on "the gross sales price of each item or article of tangible personal property when sold at retail or distributed in this State." Virginia Code §58.1-602(17) defines the term "sales price" to mean, "the total amount for which tangible personal property or services are sold. Excluded from the meaning of the term "sales price" by this same subsection is, "an amount separately charged for labor or services rendered in installing, applying, or remodeling or repairing property sold."
The invoice recently provided by the taxpayer describes the bonus paid as a, "[b]onus for each business day purchaser [taxpayer] has beneficial use of ... Tilt Tray Sorting Equipment prior to April 1;:, 1988." The invoice provides further that the taxpayer had the use of the equipment for a total of 20 days at the rate of $ per day, for a total bonus paid of $****** Conspicuous by its absence from the invoice however is any statement that the entire additional (bonus) amount paid represented a charge for installation labor, as is required for exclusion from the statutory definition of "sales price" cited above. Thus, based on the available information I cannot agree that the entire amount paid as a bonus represented a charge for installation labor, and the auditor correctly held this amount taxable in the audit. However, the taxpayer has an additional 60 days to submit further documentation, such as a copy of the purchase order or contract for its sorting equipment describing in more detail the terms under which the bonus would be paid. If such documentation is received within this time period, the department will reconsider its position on this issue.
Section 58.1 -608(1) of the Virginia Code provides an exemption from the sales and use tax for "machinery...used directly in ... manufacturing ... products for sale or resale. " In Golden Skillet v . Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), copy enclosed, the Virginia Supreme Court stated that this statute, "is intended ... to provide [an] exemption for machinery and tools used in ... manufacturing ... products for sale or resale in the industrial sense." Furthermore, Virginia Retail Sales and Use Tax Regulation (VR) 630-10-63(B)(1), copy enclosed, provides in relevant part that, "[e]stablishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in non-industrial activities."
Under the foregoing, in order to qualify for the manufacturing exemption, the taxpayer must: (i) produce products for sale or resale, and (ii) such production must be industrial in nature. Virginia Code §58.1-602(9), copy enclosed, provides that businesses classified in codes 10-14 and 20-39 of the Standard Industrial Classification Manual ("SIC" Manual) are entitled to the manufacturing exemption in Virginia Code §58.1-608(1). However, the SIC Code of the taxpayer in this case falls within Group 59 for nonstore retailers. (See, SIC Manual, 1987 edition, p. 332, enclosed).
As shown in its 1989 annual report, the taxpayer's monogramming operation is impressive. Through the use of computerized equipment the taxpayer is able to personalize brass, wood, lucite and textile products being sold to customers. However, despite its sophistication, the monogramming operation still remains an incidental part of the taxpayer's catalog retail sales business. Thus, I cannot conclude that the taxpayer's monogramming equipment qualifies for the manufacturing exemption.
Based on all of the foregoing, I find no basis for correction of the assessment. However, the taxpayer has 60 days within which to submit the additional information requested above, before a revised notice of assessment will be issued.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner