Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, industrial printer and mailing bulk direct mail
Topic
Collection of Delinquent Tax
Date Issued
11-18-1999
November 18, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to your client, ***** (the "Taxpayer'), for the period of August 1994 through July 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an industrial printer engaged in the business of designing, developing, printing, assembling, and mailing bulk direct mail. The majority of the Taxpayer's business are turnkey jobs which include all steps listed above; however, the Taxpayer also provides mailing services of pre-printed items.
The Taxpayer traditionally has been treated as an industrial printer and enjoyed the industrial manufacturing exemption set forth in Code of Virginia § 58.1-609.3(2). As a result of the recent audit, the Taxpayer was assessed tax on an ACS-BCR System 102 ("Bar Code Machine') and on the Cyberview System. The Taxpayer contends that the equipment qualifies for the manufacturing exemption under Code of Virginia § 58.1-609.3(2), and requests that the assessment be corrected to exclude these items.
DETERMINATION
Generally
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in ... manufacturing ... products for sale or resale.' (Emphasis added). The term "used directly' is defined in Code of Virginia § 58.1-602 (copy enclosed) as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing ... process, but not ancillary activities such as general maintenance or administration.'
Keeping the above in mind, I will address the two contested issues below.
Bar Code Machine
As provided above, the Taxpayer is an industrial printer specializing in direct bulk mail. During the production process, the Taxpayer prints bar codes on mailing envelopes which provide information as to the destination of the mailing. The Taxpayer incorporates the use of a Bar Code Machine after the mail pieces are printed and assembled in order to batch the bulk mailings by destination. Once the Bar Code Machine sorts the individual mail pieces into geographical batches, the batches are placed into trays, shrink-wrapped, and transferred to the Taxpayer's in-house post office and then shipped out. The Taxpayer believes the Bar Code Machine is used directly in the production process and is exempt from the tax.
Title 23 of the Virginia Administrative Code (VAC) 10-210-920, copy enclosed, provides that manufacturing activities can be segregated into three separate functions, those being administration, production, and distribution. In order to determine if the Bar Code Machine enjoys the manufacturing exemption, it must be determined where the production activity (exempt) ends, and the distribution activity (taxable) begins.
Title 23 VAC 10-210-920(C)(2) addresses the production function of an industrial manufacturer and provides that the exemption applies to the "wrapping or packaging equipment and supplies used at the plant site in packaging products for sale or resale.' In the present case, the Bar Code Machine is used to sort finished products prior to the Taxpayer's packaging operation, i.e., placing in trays and shrink-wrapping. Based on the reading of the above regulation, since the Bar Code Machine is used prior to the packaging function, and the packaging function is an exempt activity, the Bar Code Machine sorting function would qualify as an exempt activity. This position is supported by Public Document (P.D.) 94-265 (8/26/94), copy enclosed. For this reason, I find basis for removing the Bar Code Machine from the audit findings.
Cyberview System
The Cyberview System (the "System') consists of a scanner, monitor, and various computer equipment which transforms production documents in process into computer images which are transmitted to the Taxpayer's customer for the customer to perform quality control checks on work in process. If the customer detects an error, they can notify the Taxpayer and steps can be taken to remedy any problems. The Taxpayer believes the System is used for production line testing and quality control and is exempt from the sales and use tax under Code of Virginia § 58.1-609.3(2).
Title 23 VAC 10-210-920.C(2) provides that computer hardware and software used to direct or control production lines and/or quality control operations "are generally considered to be exempt production equipment.' However, this section goes on to provide that such computers are distinguished from computers which merely monitor production operations.
Based on the information you and the auditor have provided, the System, while it may facilitate the quality control function, does not actually direct or control any aspect of the production process. The System merely provides the Taxpayer's customer with a work-in-process visual to monitor the progress. This situation is analogous to the one addressed in P.D. 96-251 (9/27/96), copy enclosed. Based on the facts presented, I find that the System is not used in a production line quality control function as set out in the regulation and in prior determinations. Accordingly, the System was correctly included in the audit findings, and there is no basis for its removal.
Based on all of the above, the audit report will be adjusted to remove the Bar Code Machine, and a revised bill will be sent to the Taxpayer. If you should have any questions, please contact ***** Office of Tax Policy, at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17459K
Rulings of the Tax Commissioner