91-267 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Industrial Materials; Newspaper Inserting Equipment

Topic

Taxability of Persons and Transactions

Date Issued

10-23-1991

October 23, 1991

Re: §58.1-1821 Application: Sales and Use Tax

Dear***************

This will reply to your letter of May 3, 1991 in which you submit an application for correction of sales and use tax assessed to ************* (the Taxpayer) as the result of a recent audit.

FACTS

The Taxpayer is in the business of publishing newspapers. The Taxpayer takes exception to several items held taxable in the recent sales and use tax audit. The first item of contention involves the assessment of tax on the book value of newspaper inserting equipment removed from the Taxpayer's primary production plant and installed at a secondary facility owned by the Taxpayer. The Taxpayer feels that the secondary facility is a separate production facility where the unfinished product (newspaper) is assembled by inserting supplements and advertisements, thus continuing the exemption for the inserting machinery.

The Taxpayer also contests the assessment of tax on aircraft modifications. In June 1987, the Taxpayer purchased an aircraft for company use. At the time of purchase, the aircraft was not fully equipped to meet the Taxpayer's needs. The Taxpayer transported the aircraft to Texas and Arkansas where the necessary modifications were made. No sales or use tax was paid on the materials used in the modification of the aircraft. The auditor assessed the 4 1/2% retail use tax on materials used in the modification. The Taxpayer feels the 2% Aircraft Sales and Use Tax should be applied to the total cost of the aircraft, including modifications.

Finally, the Taxpayer is requesting abatement of penalty. The Taxpayer feels the low compliance ratio is the direct result of the aircraft modification issue as discussed above.

DETERMINATION

Newspaper Inserting Equipment

In regard to the newspaper inserting equipment located at your secondary facility, Va. Code §58.1-608(3)(b) provides an exemption for the following:

- Machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale. (Emphasis added.)

Virginia Regulation (VR) 630-10-63(B)(2) defines "used directly" as follows:

- The term "used directly" refers to those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration.
  
  The integrated manufacturing process noted above includes the production line of a plant, factory, mill, etc., starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the plant site... (Emphasis added.)

Based on the facts presented in your letter, the newspaper is not completed for sale until the various components of the newspaper are processed through the inserting machinery. The above regulation states that production continues until the product is completed for sale. The fact that the newspaper is not ready for sale until the inserting operation is complete, infers that a Taxpayer may operate more than one plant site, thus making the inserting equipment exempt. The audit will be adjusted accordingly.

Aircraft Modifications

Va. Code §58.1-1501 defines "Sales price", for Virginia Aircraft Sales and Use Tax purposes, as follows:

- "Sales price" means the total price paid for an aircraft and all attachments thereon and accessories thereto, exclusive of any federal manufacturer's excise tax, without any allowance or deduction for trade-ins or unpaid liens or encumbrances.

VR 630-11-1501(8)(a) (copy enclosed) defines sales price as it relates to aircraft and states the following:

- The term "attachment thereon" and "accessories thereto" as used herein mean all tangible personal property that is physically attached to aircraft, including installation charges, or property that is customarily used in aircraft, whether or not affixed to the structure of the aircraft, and which was transferred in the same transaction as the aircraft as a Dart of the aircraft sale. Such tangible personal property transferred other than in the same transaction with the aircraft will be subject to the [4%%] retail sales and use tax. (Emphasis added.)

Therefore, all materials consumed in the modification would be subject to the Virginia retail sales and use tax, provided sales tax was not paid to the state in which the modifications were made.

Based upon the information available to the department, the sales tax paid on modifications performed in the state of Arkansas, was tax on the labor cost only. Therefore, the Virginia use tax assessed on the materials used in the modification of the aircraft is correct. If the Taxpayer can demonstrate that sales tax was paid on the materials used in the modifications, the department will adjust the audit accordingly.

Penalties

VR 630-10-80(C)(1) (copy enclosed) provides for the mandatory application of penalty to second and subsequent audits. Assessment of penalty on audits is determined by the level of compliance exhibited by the taxpayers. Use tax compliance on second generation audits must be 50% or greater. Use tax compliance on the audit in question was only 4%. Removal of all contested items from the audit would result in a use tax compliance ratio of only 17%. For this reason, I find no basis for waiver of penalty.

The audit will be adjusted according to this determination and we will issue a revised Notice of Assessment. If you should have any further question, please feel free to contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

TPD/5199K

Rulings of the Tax Commissioner