Tax Type
Retail Sales and Use Tax
Description
Computer assisted drawing (CAD) system; Manufacturing
Topic
Property Subject to Tax
Date Issued
03-04-1999
March 4, 1999
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 March 1995 through February 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of high speed machinery. At issue is the tax assessed to the Taxpayer's purchase of a computer aided design (CAD) system used in connection with the manufacturing process. The CAD system is used to create drawings to show exact dimensions and specifications of a particular part. The drawings are in turn used to make the respective part. The Taxpayer contends that the CAD system is exempt from the sales and use tax because it is an integral part of the manufacturing process.
The Taxpayer also claims that the assessment of tax is inconsistent with advice from the prior auditor that allowed an exemption on the CAD system.
DETERMINATION
Tax Application to CAD Equipment
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 added).
The information provided indicates that the CAD system is used to make drawings which are then used in the design of the manufactured part. In this case, the CAD system is used in a preproduction activity, as the CAD system is used to make the drawings 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 a 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 CAD system purchased by the Taxpayer is analogous to the CAD system in P. D. 91-291. In both cases, the CAD systems are essential to the production of the finished product but are not used in actual production.
Based on longstanding established policy, I cannot agree with the Taxpayer that the CAD system is used directly in manufacturing. While the regulation may not specifically address CAD systems, the regulation clearly provides that tangible personal property that is not an immediate part of the actual production is taxable.
Application of the Tax- Prior Audit
You claim that you were instructed in the previous audit that the CAD system qualifies for exemption from the tax.
I have reviewed the prior audit of the Taxpayer and find no evidence that instructions were provided by the auditor regarding the CAD system. Further, the Taxpayer has not provided documentation to support its assertion. As our policy regarding the application of the tax to CAD equipment is established policy, I find that the auditor correctly assessed the tax in this case.
Summary
The Taxpayer will shortly receive an updated bill with interest accrued to the date of protest. The bill should be paid within 30 days to avoid the accrual of additional interest.
If you should have any questions, please contact ***************, Tax Policy, at ********************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17536T
Related Documents
Rulings of the Tax Commissioner