93-32 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing, processing, assembling, or refining; Document conversion project

Topic

Taxability of Persons and Transactions

Date Issued

02-24-1993

February 24, 1993

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

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

This will reply to your letter of May 4, 1992 in which you seek correction of a sales and use tax assessment for ***************(the Taxpayer).

FACTS

The Taxpayer operates primarily as a distributor of computer related products. An audit for the period of March 1989 through April 1991 produced an assessment for the Taxpayer's failure to remit the sales and use tax on the purchase of certain tangible personal property. The Taxpayer contests that portion of the assessment on computer hardware and software, contending that the property is exempt manufacturing equipment.

During 1990 the Taxpayer purchased the contested items in connection with a document conversion project for the State of New York. Based on documents supplied by the Taxpayer to the auditor, the project consists of microfilming a paper document and then scanning the microfilm to create a digitized image. The image thus created is stored on magneto-optical media and then indexed. Indexing consists of viewing an image and keying index data so that the images may be retrieved using various applications.

You maintain that most of the conversion process was performed outside of Virginia and that the contested equipment was used in Virginia predominantly for indexing the previously converted documents. You further maintain that after the indexing was complete the contested equipment was given to the State of New York.

DETERMINATION

Virginia Code §58.1-608 (3)(b) exempts from the Virginia Retail Sales and Use Tax:

- 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.

The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth. 214 Va. 276, 199 S.E. 2d 511 (1973), held that the above statute was intended "to provide exemption for machinery and tools used in ... manufacturing ... products for sale or resale only in the industrial sense." (emphasis added)

In addressing this concept of industrial activity, Virginia Code §58.1-602 provides in part that:

- The determination whether any manufacturing...activity is industrial in nature shall be made without regard to plant size, existence or size of finished product inventory, degree of mechanization, amount of capital investment, number of employees or other factors relating principally to the size of the business. Further, "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...

Based upon the department's review of the Taxpayer's indexing activities, it does not appear that those activities fall within codes 10 through 14 and 20 through 39 of the Standard Industrial Classification Manual, nor does it appear that those activities are similar to other businesses classified within those codes. Rather, the indexing activities You describe are more properly classified under codes 7371-7379, which describe computer related services.

Further, B 1 of (VR) 630-10-63 that "[e]stablishments which manufacture tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities." It is clear in this case that any "manufacturing" that may occur is secondary to the service of indexing documents. Therefore, the Taxpayer is not an industrial manufacturer for purposes of the sales and use tax exemptions.

Furthermore, the fact that the contested equipment was given to the State of New York after the completion of the project has no bearing on the application of the tax in this instance. Virginia Code §58.1-604 imposes the tax "upon the use or consumption of tangible personal property in this Commonwealth...." Clearly, the Taxpayer made a taxable use of the equipment in Virginia to satisfy its contract.

Based on the foregoing, I find no basis for correction of the assessment. The full amount of the assessment, with interest accrued to date, is hereby due and payable.

Sincerely,

W. H. Forst
Tax Commissioner
OTP/6164I

Rulings of the Tax Commissioner