Tax Type
Retail Sales and Use Tax
Description
Lease of digital imaging systems
Topic
Collection of Delinquent Tax
Date Issued
07-08-1999
July 8, 1999
Re: Request for Ruling: Retail Sales and Use Tax
Dear***********************
In your letter of March 1, 1999, you request a ruling on the application of the retail sales and use tax to digital imaging systems leased by *************(the "Taxpayer"). Copies of cited sources are enclosed.
FACTS
The Taxpayer entered into master lease agreement to lease digital imaging systems (the "equipment") for a five-year term for use at its retail locations. At the end of the lease term, the Taxpayer has the option to return the equipment to the lessor, purchase the equipment at its fair market value, or renew the lease for an additional term at the fair market rental value.
With minimal intervention by store personnel and without use of negatives, customers operate the equipment to reproduce, manipulate, enhance, enlarge, and customize images of their existing photographs. Images are printed or saved on digitized files, such as on magnetic or compact disks, and are sold to customers.
The equipment consists of computer hardware and software, touch screen monitor, scanner, and printer. The Taxpayer is primarily engaged to operate retail drug stores, but asks if this digital imaging and printing equipment qualifies for the industrial manufacturing exemption.
RULING
Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacements thereof...used directly in...manufacturing . . . products for sale or resale." Such property may be purchased exclusive of the tax only by an industrial manufacturer or processor for direct use in producing products for sale or resale. See Title 23 of the Virginia Administrative Code (VAC) 10-210-920(A).
In Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), the Virginia Supreme Court held that the above cited statute was intended "to provide exemption for machinery and tools used in...manufacturing...products for sale or resale only in the industrial sense." For purposes of the manufacturing exemption, the term "industrial in nature" is defined in Code of Virginia § 58.1-602 to include, "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification [SIC] Manual." (Insert added.) The SIC Manual classifies retail drug store businesses such as the Taxpayer's business as non-industrial retail trade establishments. (See code 5912 of the SIC Manual, 1987 Ed., page 329).
Further, the department has previously determined that a digital processing system constituted a non-industrial photocopying process. In Public Document (P.D.) 97-377 (9/18/97), the department held that purchases of a digital printing system and a color copying machine made by a retail copy center were not entitled to the industrial manufacturing exemption. The key determinant was that the taxpayer's type of business did not fall within an industrial classification of the SIC Manual as it was primarily engaged in copying and duplicating activities which do not qualify for the manufacturing exemption.
Moreover, the department has consistently deemed photocopying operations as non-industrial in nature. For example, see 23 VAC 10-210-3010(K) and P.D. 89-241 (9/11/89). In P.D. 89-241, a commercial photocopy business was denied the industrial manufacturing exemption as its activities fell within a non-industrial classification of the SIC Manual. I would note that such business was held liable for tax on a leased photocopier capable of converting images, changing scales, and restoring old prints.
Based on the foregoing, l must conclude that the Taxpayer does not satisfy the "industrial in nature" requirement. Accordingly, its digital imaging and printing equipment is not entitled to the industrial manufacturing exemption. Rather, when this equipment is used in Virginia, it is subject to the Virginia retail sales and use tax of 4.5% based on the gross proceeds charged under the lease agreement. If the Taxpayer decides to purchase the equipment at the end of the lease term, the tax also applies to the sales price charged regardless of whether the sales price is set at the fair market value or some other amount.
I would note that the Taxpayer may purchase exempt from the tax, under the resale exemption, photo paper and inks that will become an ingredient or component part of the finished products which it sells.
I would also note that local property tax charges paid by a lessee on leased property are currently subject to the sales and use tax regardless of whether separately stated or not. See 23 VAC 10-210-840. However, the 1999 General Assembly amended the definition of sales price to exclude from the retail sales and use tax separately stated local property tax charges passed on from a lessor to its lessee. This law change becomes effective July 1, 1999. See House Bill 1911 (Chapter 723 of the 1999 Acts of Assembly).
If you have any questions about this response, please contact ***************of my tax policy staff at***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21566R
Rulings of the Tax Commissioner