95-23 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing; Engravings and photogravures

Topic

Taxability of Persons and Transactions

Date Issued

02-10-1995

February 10, 1995

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

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

This will reply to your letter and recent meeting with members of my staff concerning ********** (the "Taxpayer") and the sales and use tax audit assessment for the period March 1, 1991 to December 31, 1993.

FACTS

The Taxpayer is a publisher of hand-painted antique engravings and photogravures, which are sold primarily on a wholesale basis. Black and white images are printed on multiple sheets of heavy high quality paper by using a custom made graphics art printing machine. Each print is then hand-tinted, sprayed, and platemarked. Afterwards, the prints are inspected for quality, corrected when necessary, and placed in inventory. Matting and shrink wrapping services are also available to customers.

The Taxpayer contends that the production of these hand-painted prints is exempt from sales and use tax as industrial manufacturing under Code of Virginia §58.1-609.3(2). Therefore, items used directly in its manufacturing activities should be removed from the audit and the assessment should be adjusted.

DETERMINATION

Code of Virginia §58.1-609.3(2)(iii) provides an exemption for, "[m]achinery or tools or repair parts therefor or replacements thereof, ... supplies, used directly in processing, manufacturing, refining, mining, or converting products for sale or resale." The Virginia Supreme Court addressed the manufacturing exemption in Golden Skillet v. Commonwealth. 214 Va. 276, 199 S.E.2d 511 (1973) by indicating that the exemption applies to machinery, tools, and supplies used in the manufacturing or processing of products for sale or resale only in the industrial sense. For purposes of the manufacturing exemption, Code of Virginia §58.1-602 provides that the determination as to whether a manufacturing activity is industrial in nature shall not be based on plant size, existence or size of finished product inventory, degree of mechanization, amount of capital investment, number of employees, or other factors relating to the size of the business. Further, Virginia Regulation (VR) 630-10-63(B)(2) provides that an industrial manufacturer:

- [s]hall include but not be limited to businesses classified or substantially similar to other businesses classified in code 20 through 39 of the Standard Industrial Classification (hereinafter "SIC") Manual published by the U. S. Department of Commerce. (Emphasis added.)

While there is no specific classification in the SIC Manual that relates to the Taxpayer's activities, the manufacturing activities described in category # 2759, Commercial Printing, Not Elsewhere Classified, are significantly similar to the activities used by the Taxpayer in producing prints. For example, printing from engraved and etched plates is significantly similar to the printing activities conducted by the Taxpayer before hand-painting the prints. In addition, the Taxpayer directly competes with like businesses that produce color printing through lithographic and gravure activities as described in manufacturing categories # 2752 and #2754. As a result, the Taxpayer's activities qualify for the manufacturing exemption. Accordingly, equipment, tools, and supplies used directly in manufacturing will be removed from the audit.

Based on the policies set forth in this letter, I am asking the department's Richmond District Office to review the Taxpayer's audit and make any necessary changes. It is possible, however, that some additional information may be required from the Taxpayer in order to complete the necessary revisions. In any event, we will complete the revisions as soon as practical and issue a revised Notice of Assessment to the Taxpayer. If additional information is needed, please call***************

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

OTP/8100N

Rulings of the Tax Commissioner