Document Number
Tax Type
Retail Sales and Use Tax
Manufacturing, processing, assembling, or refining; Photocopiers; Maintenance contracts; Exemptions; Exemption certificates; Incomplete or inaccurate certificates
Taxability of Persons and Transactions
Date Issued
March 20, 1995

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


This will reply to your correspondence and subsequent phone conversations with a member of my Tax Policy staff seeking correction of a sales and use tax assessment issued ************(the Taxpayer) for the period June 1990 through May 1993.

The Taxpayer is engaged in the business of industrial printing and also operates two retail locations which provide copy services and the preparation of proofs and other pre-press work. As a result of the department's audit, an assessment was made for certain untaxed sales and purchases. The Taxpayer protests four issues raised in the audit, each of which will be addressed below.

Exemption certificates: The Taxpayer made untaxed sales to nonprofit organizations which informed the Taxpayer that they were exempt from the tax. Alternatively, some of these nonprofit customers deducted the sales tax from their invoices.

Code of Virginia §58.1-623 provides that "all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale...of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt...." As a precaution, however, Virginia Regulation (VR) 630-10-20 provides that "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable...." Further, certificates of exemption obtained during or after an audit situation will be accepted only if the department can confirm that the customer's use of the certificate was valid and proper for the specific transaction.

The certificate you received after the audit does not include a valid sales tax registration number. Because the exemption certificate obtained by the Taxpayer is not valid, the department cannot accept it.

Photocopier: It is the department's understanding that the photocopier in question is leased for use at one of the Taxpayer's retail photocopy locations. The Taxpayer maintains that the copier is used in connection with its printing operation and qualifies for the manufacturing exemption.

Code of Virginia §58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools...used directly in...manufacturing...products for sale or resale." Pursuant to §58.1 -602, the exemption applies to activities which are industrial in nature and includes "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification (SIC) Manual...." That same statute further indicates that "manufacturing " means "the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale...." (Emphasis added)

The Taxpayer's printing operation is classified as an industrial manufacturing business in the SIC Manual under Code 2799. However, retail photocopying businesses are classified in the SIC Manual as nonindustrial service activities (Code 73). The department's consistent policy has been that photocopy operations are not industrial manufacturers; this policy is set out in the enclosed Public Document 84-234 (11/21/84).

the copier in question is sometimes used in pre-press functions in connection with the Taxpayer's printing operation, it is not used at the printing plant site. Accordingly, the manufacturing exemption, which is limited to activities at the plant site, is not applicable. Likewise, the use of the machine for pre-press work is secondary to its use in the photocopying of originals for retail customers.

Finally, it should be noted that, Code of Virginia §58.1-609.3(11) provides an exemption for "[h]igh speed electrostatic duplicators or any other duplicators which have a printing capacity of 4,000 impressions or more per hour purchased or leased by persons engaged primarily in the printing or photocopying of products for sale or resale." Two copiers of this type were exempted from the tax, but the department understands that this particular copier is not a high speed duplicator as defined above.

Maintenance contracts: With regard to maintenance agreements, VR 630-10-62.1. indicates that "[m]aintenance contracts...which provide both repair or replacement parts and repair labor, represent a sale of tangible personal property. The total charge for such contracts is subject to the tax...."

Generally, the application of the tax to maintenance contracts will follow the same application of the tax to the equipment for which such contracts are intended. Therefore, maintenance contracts on the Taxpayer's exempt printing machinery are also exempt. In this case, however, the maintenance contracts are for the photocopier discussed above and other photocopying equipment for which no manufacturing exemption exists. Because they call for the provision of parts and labor, and because the photocopiers are deemed to be taxable, the maintenance contracts are also taxable.

However, effective January 1, 1996, parts and labor maintenance contracts are subject to the tax on one-half the total charge for such contracts. See Code of Virginia §58.1 -609.5(9), copy enclosed .

: The Taxpayer contends that a certain sale included in the audit sample was nonrecurring in nature since this sale was to a customer who purchases tangible personal property only on an annual basis. Therefore, you maintain that this sale is not representative of the audit period.

The fact that only sporadic sales were made to this customer during the entire audit period does not by itself render the sample inaccurate. The sale to this customer is apparently of the same nature as sales made to other customers during the audit period. While this customer made only one purchase during the sample period, but not throughout the entire audit period, there are likely other regular customers who did not make purchases during the sample period. Therefore, l find the audit techniques in this case were properly applied, and the invoice in question is representative of the audit period.

Based on the information currently before me, it appears that the assessment is correct. However, I find grounds to waive the penalty portion of the assessment and to accrue interest on the unpaid assessment only through the date of your letter. A notice of assessment reflecting the adjustment for penalty and interest will be issued shortly. No additional interest will accrue provided that the outstanding balance is paid within 30 days of the date of this letter. If you have any questions regarding this determination, you may contact*************.
                            • Sincerely,

                              Danny M. Payne
                              Tax Commissioner


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46