Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Video tape production
Topic
Taxability of Persons and Transactions
Date Issued
02-17-1993
February 17, 1993
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear**********:
This will reply to your letter of December 5, 1991 in which you request reconsideration of the department determination of October 23, 1991 with regard to your client,***** (the "Taxpayer").
FACTS
You continue to maintain that the Taxpayer qualifies for exemption from the sales and use tax as an industrial manufacturer. As you point out, if it is determined that the Taxpayer is in fact an industrial manufacturer, a number of other issues raised in the audit would be moot. In the alternative you maintain that the Taxpayer qualifies for sales tax exemption under the broadcasting exemption. Further, you contend that a portion of the assessment is erroneous because of duplication of the tax on certain equipment covered by a sale/leaseback financing arrangement, and request abatement of the penalty assessed because of problems with one employee.
DETERMINATION
I will address each of these issues separately below:
1. Manufacturing exemption: You maintain that the Taxpayer's production of video tapes is industrial manufacturing and cite several rulings of the Commissioner which you believe have some bearing on the issue and present various arguments supporting its qualification for the exemption.
Virginia law provides that in order to qualify for the manufacturing exemption in Va. Code §58.1-608(A)(3)(b) a business must be manufacturing or processing products for sale or resale and such production must be "industrial in nature." Va. Code § 58.1-602 provides that "industrial in nature" shall include, but not be limited to, those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual for 1972 and any supplements issued thereafter.
While the exemption is not limited solely to businesses classified in the above codes, the courts have determined, in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511(1973) and Commonwealth v. Orange-Madison, 220 Va. 655, 261 S.E.2d 532 (1980), that the exemption was available "only to true manufacturers or industries" and concluded that manufacturing that was purely ancillary to the retail nature of a business and the services provided by the retailer was not industrial in nature.
You maintain that since the department determined in P.D. 87-61 (2/27/87) that equipment used in producing records and tapes qualified for exemption from the tax, the Taxpayer's equipment used in producing videotapes which is similar to equipment used to produce records and tapes, should likewise qualify for the exemption. SIC code 3652 (not 3552 as stated in your letter) includes establishments primarily engaged in manufacturing phonograph records and prerecorded audio tapes and disks and clearly falls within the codes cited above as industries qualifying for the exemption. On the other hand, establishments, such as the Taxpayer's, which are primarily engaged in the production of theatrical and nontheatrical motion pictures and video tapes for exhibition or sale, including education, industrial, and religious films are classified in Industry 7819 and not within the codes cited above.
Further, the department ruled in P.D. 87-62 (2/27/87) that the production of video tapes and slides for use in presentations and for other purposes was not industrial in nature and thus did not qualify for exemption from the tax. The production of video tapes for customers in the instant case and in P.D. 87-62 are clearly distinguishable from the production of tapes and records as provided in P.D. 87-61 (in which the taxpayer was mass producing prerecorded phonograph records and audio tapes) since the taxpayers' manufacturing activities are generally ancillary to the retail nature of the business and the services rendered in producing products. The ancillary nature of the manufacturing is evidenced by the fact that tapes are custom produced (rather than mass marketed) to meet the needs of each customer, in much the same way that an artist or photographer carries on his trade.
The ruling of the Commissioner dated 10/25/84 addressed the treatment of sales by an "audio production studio," and held that tapes produced and sold were subject to the sales tax because the "true object" sought by the customers of the taxpayer was to obtain the tapes themselves, not the services which produced the tapes. While this ruling was incorrectly cited in my determination letter to the taxpayer as relating to equipment (correct cite - P.D. 87-61), it is applicable to the instant case in that sales by the Taxpayer of video tapes are taxable.
You maintain that it cannot be correct for the department to assert simultaneously that the true object of the Taxpayer's customers is to obtain the physical video tape and the physical production of this tape by the Taxpayer is purely secondary to the services rendered by the Taxpayer to its customers.
In WTAR Radio-TV v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977), the court determined that some service is involved in the production of every article that is sold. In addition and as explained above, the secondary nature of the manufacturing in the instant case is evidenced by the fact that tapes are custom produced (rather than mass marketed) to meet the needs of each customer. Thus, while the Taxpayer is providing services in the production of the tapes, the "true object" is the end product of the Taxpayer's services - the tapes themselves. Without a suitable finished product, it is not likely that customers would seek the services of the Taxpayer. Accordingly, the department is correct in its assertions.
You also contend that the classification of the Taxpayer for local license taxes and of its machinery for local property taxes should have a bearing on its qualification for the industrial manufacturing exemption. As explained in my letter of October 25, 1991 to the Taxpayer, this has no direct bearing on this matter. The laws permitting localities to impose license and property taxes refer to manufacturers in general, while the sales and use tax law refers to "industrial" manufacturers. The Golden Skillet opinion specifically noted that the sales tax is more restrictive than the laws relating to license taxes. Therefore, the Taxpayer's classification by the city of Alexandria is of no consequence.
2. Broadcasting exemption: As explained in my prior determination, the broadcasting exemption in Va. Code § 58.1-608 (A)(6)(b) is available only to commercial radio or television companies, cable television systems, or other concerns under the regulation and supervision of the Federal Communications Commission (FCC). Furthermore, the exemption is restricted to broadcasting equipment and parts and accessories thereto and towers used or to be used by such entities.
You maintain that the exemption merely "requires that the equipment be 'broadcasting equipment' which is either (a) used by a commercial television company or (b) used by any other entity under the regulation or supervision of the FCC." You maintain further that while the Taxpayer itself is not actually engaged in broadcasting, it is entitled to the exemption since its equipment is used by another company ("Company A") licensed by the FCC with which it has a contractual arrangement to transmit the signals.
I, however, cannot agree with your interpretation. In Winchester Cable TV v. State Tax Commissioner, 216 Va. 286, 290, 217 S.E.2d 885, 889 (1975), the court held that in order to qualify for the broadcasting exemption the taxpayer had to be a broadcaster. From the information provided, and as you assert, the Taxpayer itself is not engaged in broadcasting - it contracts with Company A to transmit its signals. In addition, the fact that the Taxpayer itself is not licensed by the FCC further negates its eligibility for the exemption. Further, you should note that under the principles established by the courts, taxation is the rule and exemption is the exception. Therefore, exemptions from the sales and use tax are strictly construed against the taxpayer.
In addition, you maintain that your position is supported by the Ruling of the Commissioner of February 9, 1984 in which the department "held that the broadcasting equipment leased to a radio station may be exempt from the tax even though the purchaser is clearly not under FCC regulation." This ruling is inapplicable to the instant case as it deals with the resale issue - broadcasting equipment purchased by one organization for resale/lease to another entity.
Accordingly, I can find no basis for finding that the Taxpayer qualifies for the broadcasting exemption.
3. Double taxation: You maintain that it was always intended that the purchased equipment would be financed through a sale/leaseback transaction. As explained in earlier determination, if the Taxpayer used the equipment prior to engaging in the sales/leaseback transactions it would not be entitled to a refund of the tax paid at the time of purchase of the equipment.
Although I understand that the double taxation issue requires a comparison of the extensive list of leased equipment to the taxed purchases of equipment by the Taxpayer listed by the auditor, I am unable to revise the assessment without such information. If the Taxpayer can identify the specific purchases or verify that taxes were paid on the original purchases of the equipment included in the assessment, I may be willing to revise the assessment. It is
my understanding that the Taxpayer has already begun to gather this information.
4. Penalty: As agreed upon during a telephone conversation with a member of my Tax Policy staff, we will consider abating the penalty assessed if the Taxpayer can provide additional information confirming its assertion that a particular employee acted on his own, rather than with the consent and cooperation of the owner and other management of the Taxpayer, in failing to remit collected sales tax to the department. It is my understanding that you are in the process of preparing an affidavit attesting to the actions of such employee and the ways in which he concealed his actions. Upon receipt of such information the department will waive the penalty assessed.
Accordingly, the assessment will be revised in accordance with my prior determination and as indicated above provided the information requested herein is provided to the department. Such information should be sent within 60 days of the date of this letter to the department's Office of Compliance, Audit Review Unit, P. O. Box 615, Richmond, Virginia 23205-0615. If the documentation is not received within the specified time period, the Taxpayer will be sent a revised assessment with accrued interest which shall be immediately due and payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5800B
Rulings of the Tax Commissioner