Tax Type
Retail Sales and Use Tax
Description
Manufacturing hosiery products for wholesale distribution, charges for rental/maintenance of computer
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Manufacturing
Date Issued
10-13-1982
October 13, 1982
Re: 58-1118 Application/Sales and Use Tax
Dear **********
This response is to the application of March 15, 1982, by ********* petitioning for correction of an assessment dated December 30, 1981, of sales and use tax liability covering the period of January 1979 through October 1981. The liability in question is a $ ***** use tax and $ *****penalty, plus interest.
FACTS
******** is in the business of manufacturing hosiery products for wholesale distribution from its plant in Danville. The company's computer system controls the incoming raw material inventory, schedules the operation of the machinery, and arranges the timely shipments of outgoing products. It is not used in production of items for resale.
In an audit of **** the department's auditor has held the company liable for the use tax on purchases and supplies on which the sales or use tax had not been paid and for the use tax on rentals of computer equipment and on charges for maintenance agreements for this equipment. ******* contends that the computer system is an integral part of its manufacturing operation and thus repair and maintenance of the system qualifies for sales and use tax exemption under § 58-441.6. The company especially contests the assessment of penalty since the computer rentals and maintenance agreements were new items not appearing in previous audit deficiencies.
DETERMINATION
§ 1-63 of the Virginia Retail Sales and Use Tax Regulations (issued January 1, 1979) sets forth the sales and use tax application to industrial manufacturers. That section specifically provides that the tax applies to "all property used in administration and distribution functions." The terms "administration" and "distribution" are specifically defined as follows:
Administration includes all administrative work, such as sales production, general office and collection; clerical work in production, such as preparation of work records, production records and time records; purchasing, transporting, receiving and testing of raw materials prior to production.
Distribution includes all operations subsequent to production, such as storing, displaying, selling, loading and shipping finished products.
According to the facts set forth in your application, the computer at issue keeps a record of raw material inventory, schedules the operation of machinery and arranges timely shipment of outgoing products. It is, therefore, the position of the department that the functions of the computer at issue fall within the definitions of "administration" and "distribution." Thus, the charges for rental and maintenance of the computer are subject to tax. Penalties on these items will be waived, however, since they are new audit items for the company.
A revised assessment will be issued reflecting this adjustment, and the assessment should be paid with interest accruing to date. If, however, you desire a hearing on this matter, please let me know within 30 days. Otherwise, this letter will be considered a final determination.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner