Tax Type
Retail Sales and Use Tax
Description
Printed materials
Topic
Property Subject to Tax
Date Issued
07-11-1994
July 11, 1994
Re: Retail Sales and Use Tax
Dear***************
This will reply to your letter seeking correction of sales and use tax assessments for your clients, the*****************(the "Taxpayers") for the period February 1990 through January 1993.
FACTS
The Taxpayers, nonprofit organizations exempt from federal income taxation pursuant to I.R.C. §501(c)(3), generally serve as accreditation agencies of post secondary educational institutions. They compose, publish or have published, and distribute numerous directories, handbooks, catalogs and magazines, brochures, periodicals, newsletters, and handouts (all herein referred to as "printed materials") to nonprofit institutions of learning and others located both within and outside the Commonwealth. The various publications are provided free of charge to members, and are available for sale to students and the general public, and most are sold out of state.
The printed materials are geared toward the improvement of educational practices and maintenance of high professional standards in the educational fields and are of specialized educational and research value to members and others.
The Taxpayer was audited and found to have failed to pay/remit the tax on various purchases and on printed materials provided free of charge to its members. You cite numerous exemptions from the retail sales and use tax under which the various purchases qualify.
DETERMINATION
I will address each of your contentions individually below.
Applicability of Subdivision 2 of Va. Code §58.1-609.4
The Taxpayers recognize that they are not eligible for exemption under the above cited Code section. However, they maintain that the sales tax cannot be charged to the ultimate consumer of their publications, generally nonprofit institutions of learning, as the nonprofit institutions qualify for exemption from the tax under subdivision 2 of Va. Code §58.1-609.4.
This reasoning is correct to the extent that the printed materials are sold to nonprofit institutions of learning located both within and without Virginia and to other out-of-state entities. However, in the instant case, it is the department's understanding that the printed materials generally are not being sold to nonprofit institutions of learning but instead are being transferred from (or donated by) the Taxpayers to the institutions. Va. Code §58.1-604 provides for the imposition of a tax upon the use or consumption of tangible personal property in this Commonwealth. In the instant case, the Taxpayers are using the printed materials by donating them to the institutions of learning. Accordingly, to the extent that the printed materials do not otherwise qualify for exemption as set forth herein, they are taxable to the Taxpayers and were appropriately handled in the audit assessment.
With respect to your arguments regarding the recodification of subdivision 2 of Va. Code §58.1-609.4 you should note that while from a reading of the 1993 Cumulative Supplement to Title 58.1 of the Code of Virginia, it would appear that the exemption was substantially expanded, it was not. Instead, critical punctuation was omitted when the statutory provisions were recodified in 1993. The legislative intent was not to change the meaning/scope of the exemption, but merely to change the numbering of the exemption categories. Enclosed is a copy of the exemption analysis relating to the schools and educational telecommunications entities' exemptions appearing in the 1990 Sales and Use Tax Expenditure Study which explains the legislative history of these exemptions. Furthermore, the department's position that no change in the scope of the exemption resulted with the recodification in 1993 is supported by 73 Am. Jur. 2d. Statutes 324.
Accordingly, your arguments that each step of the Taxpayers' publication process qualify for exemption under the chain of commerce provisions are misplaced.
Printing/Publications Exemptions
Subdivision 2 of Va. Code § 58.1-609.3 provides that the retail sales and use tax does not apply to equipment, printing or supplies used directly to produce a publication described in subdivision 3 of Va. Code § 58.1-609.6 whether it is ultimately sold at retail or for resale or distribution at no cost.
A publication is described in subdivision 3 of Va. Code § 58.1-609.6 as "any publication issued daily, or regularly at average intervals not exceeding three months, and advertising supplements and any other printed matter ultimately distributed with or as part of such publications, except that newsstand sales of the same are taxable." The term is further defined in Virginia Regulation (VR) 630-10-73 as "any written compilation of information available to the general public...[but] does not include general reference materials and their periodic updates." Exempt publications generally include publications that are issued under a subscription basis, including trade magazines whose subscription price is a separately stated part of a member's dues, provided the publications meet the other exemption criteria.
It is my understanding that each month, printed materials are composed by each Taxpayer, printed and delivered/sold to member institutions, honorary members, and nonmembers. However, from the limited information available, it does not appear that the Taxpayers' printed materials qualify as exempt publications under the above cited exemption. For example, the directories and handbooks are reference in nature, and the annual meeting programs, list of attendees, and reports to members, do not appear to be available to the general public and published at least quarterly. However, upon proof that the Taxpayers' printed materials qualify for the publication exemption, they will be removed from the assessments.
Furthermore, any equipment, printing or supplies used directly in producing exempt publications may qualify for the printing exemption in subdivision 2 of Va. Code §58.1-609.3. The term "used directly" is defined in VR 630-10-63(b)(2) as "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." In addition, when a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not(taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in nonexempt activities.
As P.D. 88-154 (6/23/88), copy enclosed, indicates, the tax status of maintenance contracts for equipment used in manufacturing/industrial processing is the same as that of the equipment. Thus, if the Taxpayers' computers and other equipment are used preponderantly in producing exempt publications they would qualify for exemption from the tax as would the maintenance contracts for the exempt equipment.
Printed Materials Exemption
Some of the Taxpayers' printed materials may qualify for exemption from the tax under subdivision 4 of Va. Code §58.1-609.6 which provides an exemption from the tax for:
-
- Catalogs, letters, brochures, reports, and similar printed materials except administrative supplies, the envelopes, containers and labels used in packaging and mailing same, and paper furnished to a printer for fabrication into such printed materials, when stored for 12 months or less in the Commonwealth for use without the Commonwealth. (Emphasis added)
- Catalogs, letters, brochures, reports, and similar printed materials except administrative supplies, the envelopes, containers and labels used in packaging and mailing same, and paper furnished to a printer for fabrication into such printed materials, when stored for 12 months or less in the Commonwealth for use without the Commonwealth. (Emphasis added)
Accordingly, to the extent that the Taxpayers' printed materials meet the catalog exemption criteria, they will be removed from the assessment. However, to the extent that the Taxpayers' printed materials do not qualify for exemption under subdivisions 3 and 4 of Va. Code §58.1-609.6, they are taxable to the Taxpayers when provided free of charge to nonprofit institutions of learning in Virginia.
You should note that the language in VR 630-10-18.1 regarding the requirement that the printed materials must be used for advertising the sale of tangible personal property to qualify for exemption under subdivision 4 of Va. Code § 58.1-609.6 and the sunset date were removed by legislation in 1989.
I will have an auditor from the *********a District Office contact the Taxpayers shortly to schedule times to review any supporting documentation the Taxpayers may have regarding their qualifications for the above cited exemptions. To the extent that the Taxpayers do qualify for exemption, the assessments will be revised.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/724lH
Rulings of the Tax Commissioner