Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Equipment and supplies used in production of labels
Topic
Taxability of Persons and Transactions
Date Issued
04-02-1996
April 2, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*******
This will reply to your letter of July 6, 1995, in which you seek correction of a sales and use tax assessment to ***** (the "Taxpayer") for the period April 1992 through April 1995.
FACTS
The Taxpayer, a printer, designs and produces labels for sale to its clients. Some labels are sold partially completed and the client completes the labels in house using a printer and ribbons purchased from the Taxpayer. As a result of the department's audit, an assessment was made on certain untaxed purchases and sales. The Taxpayer contends that the bulk of the assessment is exempt from the tax pursuant to the industrial manufacturing exemption. It is my understanding that the*****District Office has resolved some of the contested items and they will be removed from the audit. Therefore, I will address the remaining contested issues separately below.
DETERMINATION
Code of Virginia § 58.1-609.3 (2) provides an exemption for industrial manufacturing and processing and exempts, "[m]achinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale...." (Emphasis added).
Code of Virginia § 58.1-602 defines the term "Used directly" as "those activities which are an integral part of the Production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration." (Emphasis added).
In accordance with the above statues, Virginia Regulation (VR) 630-10-63 (B)(2) addresses direct use and provides that the exemption applies to "machinery, tools and repair parts therefor,...which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." (Emphasis).
Laser printer: Before production of the labels, the Taxpayer will use a laser printer to make a paper proof copy of the label that is sent to the client for approval. Once a proof is approved or modified, the proof is sent to an image setter where a film is produced from the image that will result in the making of the printing plate. The paper proof is then stored by the Taxpayer for future retrieval if necessary.
In the enclosed copy of P.D. 95-218 (8/22/95), the department ruled that the purchase of a proof press used to produce a proof of the printed product prior to production was deemed to be used in pre-production activities and was not entitled to exemption from the tax. In the instant case, the laser printer is only used to produce a "proof" of the proposed label for review by the client and is not used in the actual printing/production of the labels. Therefore, the proofing process is deemed to be a part of pre-production activities, those activities which prepare materials for production. Based on the above, I find that the laser printer is appropriately held taxable by the auditor.
Paper proofs: Prior to the purchase of the above mentioned laser printer used to make paper proofs, the Taxpayer purchased the paper proofs from an outside supplier. The purchase verses the above mentioned production of paper proofs will have no bearing on the application of the tax. In either case, the proof is deemed a pre-production activity and is subject to the tax.
Distillation Solvent Recovery Unit: It is my understanding that this equipment is separate from the printing press and cleans the solvent that is used in the plate making process. In the enclosed P.D. 92-139 (8/10/92) the department ruled in a similar case that the cleaning of polymer residue from production dies was deemed to be taxable. The ruling determined that the equipment used in the cleaning function was necessary to carry on production, but was not used directly in the actual production of a product. As in that case, the distillation solvent unit may be necessary to the Taxpayer's printing operation as a whole but it does not touch directly on production as is necessary to gain exemption under Code of Virginia § 58.1-609.3 (2).
The sale of ribbons and printers: The Taxpayer sells partially completed labels to its client. The client will complete the labels using a printer and ribbons purchased from the Taxpayer. The client provides the Taxpayer with a certificate of exemption Form ST-10 indicating that the total purchase is exempt "packaging materials".
Code of Virginia § 58.1-609.3,(2) (iv) provides an exemption for "...labels for future use for packaging tangible personal property for shipment or sale...." VR 630-10-20 (B) provides that reasonable care and judgement must be exercised in accepting exemption certificates. Exemption certificates cannot be used to make tax-free purchases of any item not covered by the exact wording of the certificate.
Based on the above, the certificate of exemption provided by the client only covers the purchase of the partially completed labels which will be marketed with the client's products. The sale of the printer and ribbons used to complete printing of the labels is not covered under the exact wording of the exemption and therefore subject to the tax. Accordingly, I find that the auditor was correct in assessing the untaxed sale of the printer and ribbons in this case.
Based on the foregoing, I find no basis for adjusting the assessment. The Taxpayer will receive an updated notice of assessment shortly and this should be paid within 30 days to avoid the accrual of******additional interest. If you have any other questions regarding this letter, please contact **** at******.
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9999T
Rulings of the Tax Commissioner