Tax Type
Retail Sales and Use Tax
Description
Manufacturing
Topic
Taxability of Persons and Transactions
Date Issued
10-27-1997
October 27, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ****(the Taxpayer) for the period July 1993 through November 1996.
FACTS
The Taxpayer is engaged in the reproduction of original paintings through the process of silk screening. As a result of the department's audit, the Taxpayer was assessed tax on the untaxed purchase of original paintings.
The Taxpayer takes exception to the sales tax assessed on the original paintings and maintains that the original paintings qualify for the industrial manufacturing exemption since they are used by the Taxpayer directly in the manufacturing process.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, tools, and supplies used directly in manufacturing products for sale or resale. The term "used directly" is defined in Code of Virginia § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing...process, but not including ancillary activities such as general maintenance or administration."
In accordance with the above statutes, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 (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).
The information provided indicates that the Taxpayer purchases original paintings and uses the paintings to make silk screens. The silk screens are then used in a production process to reproduce copies of the original paintings. The Taxpayer stores the original paintings for potential future use by the Taxpayer in reproducing products for its customers. The Taxpayer's purchase of original paintings in this case is considered a preproduction activity, as the original paintings are used to make the silk screen from which the end product is ultimately made. The department's long-standing policy is that preproduction activities are taxable because they are not an immediate part of actual production.
In Public Document 91-291 (11/18/91), copy enclosed, the department ruled that the CAD system used to design and cut die patterns, while an essential part of the production process, was not used as an immediate part of the actual production. The original paintings purchased by the Taxpayer are analogous to the CAD system in P. D. 91-291; the original paintings are essential to the production of the finished product but are not used in actual production.
Based on longstanding established policy, l cannot agree with the Taxpayer that the original paintings are used directly in manufacturing; therefore, the original paintings do not qualify for the exemption under Code of Virginia § 58.1-609.3(2). Accordingly, there is no basis to revise the assessment.
The Taxpayer will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest. If you should have any questions, please contact ****Office of Tax Policy, at**** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12873T
Related Documents
Rulings of the Tax Commissioner