Tax Type
Retail Sales and Use Tax
Description
Instant Print Shop Kiosks
Topic
Taxability of Persons and Transactions
Date Issued
04-19-1996
April 19, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will reply to your letter in which you seek correction of sales and use tax assessed to your client, ******(the "Taxpayer") for the period December 1990 through December 1993.
FACTS
The Taxpayer contracted to have computerized kiosks built and financed them through a leasing agreement with a third party. The kiosks were designed for placement and use in U.S. government post offices and other locations as instant print shops which print labels, stationary, business cards, and post cards. The kiosks also possess the ability to electronically notify the U.S. Postal Service and selected mailers of changes in address, as well as to dispense postage stamps. The address change feature is provided free of charge while stamps are sold at face value which is the cost to the Taxpayer. The other services are provided for a fee. Payment for services is made at the kiosk via major credit cards, ATM cards, the Taxpayer's own money card, and currency.
The Taxpayer was assessed use tax on lease payments to the third party lessor based on the Taxpayer's use of the kiosks to provide various services. The Taxpayer opposes the tax on the grounds that the use of the kiosks to print tangible personal property for sale qualifies as industrial manufacturing exempt under Virginia Regulation (VR) 630-10-63 and VR 630-10-86. The Taxpayer acknowledges that the kiosks are also used in non-manufacturing activities when they function as address change stations and stamp dispensers. Such use constitutes less than 50% and therefore, based on the preponderance of use rule, the Taxpayer believes the lease of the kiosks is exempt.
DETERMINATION
VR 630-10-63 interprets the exemption set forth in the Code of Virginia § 58.1-609.3(2), which exempts certain tangible personal property used directly in manufacturing and processing in the industrial sense. The regulation further discusses the preponderance of use rule which provides that an item must be used more than 50% of the time in exempt industrial production processes in order to qualify for exemption. VR 630-10-86 specifically addresses printing and provides that "printing of tangible personal property for sale or resale is deemed to be industrial manufacturing."
The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), has interpreted the manufacturing exemption to apply to machinery and tools used in manufacturing products for sale or resale when used in the industrial sense. Code of Virginia § 58.1-602 states that the term "industrial in nature" shall include all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual."
Generally, businesses engaged in manufacturing are classified under SIC codes 20 through 39 and, are involved in transforming raw materials into useful and marketable products within a factory, plant, or mill environment using power driven machinery and materials handling equipment.
The kiosks are placed primarily in post offices for public use. An individual produces and obtains printed materials through the use of computer software and hardware available at the kiosks. The individual may also purchase U.S. postage stamps or notify the Postal Service and major mailers of a change of address. The Taxpayer's kiosks operate similarly to post office contract stations, which are classified under SIC Code 7389 - Business Services, Not Elsewhere Classified. The Taxpayer may also fall under SIC Code 7374 - Computer Processing and Data Preparation and Processing Services which includes businesses providing computer processing and data processing services and equipment.
The Taxpayer does not fall within the prescribed SIC codes for designation as industrial in nature. Further, the Taxpayer is not engaged in transforming raw materials in a factory setting, nor is it a printer or photo processor. The department has previously deemed printing processes and photo processing activities falling within the SIC code grouping 73 as industrial operations, when such activities do not constitute an incidental part of a retail establishment and are performed by businesses primarily engaged in the printing trade.
In this case, the printing activity is incidental to the primary purpose of the kiosks -the provision of services, which are inclusive of and in connection with the exchange of tangible personal property. As such, the Taxpayer is deemed to be providing taxable services pursuant to VR 630-10-97.1, copy enclosed, and merely uses the kiosks to render such services. Accordingly, the Taxpayer is not entitled to the manufacturing exemption under VR 630-10-63 nor the printing exemption under VR 630-10-86, and the lease of the kiosks is subject to the use tax.
This decision is governed by the rule of strict construction established by the Virginia courts. The Virginia Supreme Court has consistently held that "exemption from taxation is the exception and where there is any doubt the doubt is resolved against the one claiming exemption." See Golden Skillet Corporation. supra.
Accordingly, the assessment is upheld and the Taxpayer will receive an updated bill with interest accrued through the date of the Taxpayer's letter of protest.
If you have further questions or need additional assistance, please contact**** in the Office of Tax Policy at ***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8192J
Rulings of the Tax Commissioner