Tax Type
Retail Sales and Use Tax
Description
Industrial processor of pulp and paper products; Computer software; Boiler chemicals; Woodyard scales
Topic
Exemptions
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
07-16-1984
July 16, 1984
Re: § 58-1118 Application/July 1980-May 1983 Use Taxes
Dear *******************
This responds to your application for correction of an assessment of sales and use taxes for the audit period of July, 1980 through May, 1983.
FACTS
The taxpayer is an industrial processor of pulp and paper products. The taxpayer also harvests the raw forest products used in the processing operation. Use tax was assessed and is contested on the items described below.
1) Computer software for roll handling system. The software is a prewritten program which enables the user to account for order entry, production, roll wrapping, and eventual shipment of rolls of manufactured paper. Modifications were made to the software by the supplier based upon the taxpayer's specifications, i.e., paper machines and product mix.
2) Boiler chemicals. These chemicals are used to reduce scale and corrosion in the power boilers.
3) Scales for woodyards. The scales are used to weigh wood delivered on trucks, the wood being the taxpayer's primary raw material for manufacturing paper, paperboard, and bleached pulp products. The weight of the wood delivered determines the amount of compensation due to the supplier.
DETERMINATION
Computer Software
Since the enactment of the Retail Sales and Use Tax Act in 1966. it has been the department's consistent position that all computer software is within the definition of tangible personal property, i.e., "personal property which may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses." § 58-441.3(1). Although the department is currently in the process of receiving public comments on a proposed regulation concerning computer software, the "proposed regulation" described in the taxpayer's application for relief is not the department's proposal but a preliminary draft that circulated among representatives of the Virginia retail and industrial sectors.
After due consideration to all points of view interpreting the statutory provisions, the department has not proposed an exemption for modified prewritten software. In addition, modifications to tangible personal property cannot be separately stated in the sales price for purposes of sales and use tax, according to the "sales price" definition in § 58-441.3(b). Therefore, we are unable to consider this issue of your application. Also, the manufacturing exemption would be inapplicable as the software would be considered as used indirectly in manufacturing.
Boiler Chemicals
§ 58-441.6, Code of Virginia, exempts from the sales and use tax machinery, tools, repair parts or replacements, fuel, power, energy or supplies used directly in manufacturing. The term "used directly" is defined in § 58-441.3(q) as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration." (Emphasis added.)
The Virginia Supreme Court, in the case of Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E. 2d 252 (1978), held that under the provisions of § 58-441.3(q) and Regulation-1-63, chemicals used in the maintenance of the taxpayer's boiler were taxable. Regulation 1-63 provides in part that "the expenditures concerned with general mainte-nance...of plant and office buildings are taxable since these functions are only indirectly involved in production."
In your application for relief, you state that the boiler chemicals "are not used for general maintenance on exempt production equipment. They are specifically used as required on specifically exempt equipment." Based upon the facts presented to our auditor and in your application, your characterization of the chemicals does not alter our determination of them to be taxable, based on Webster Brick v. Department of Taxation, supra. Chemicals used to prevent corrosion of the boiler and pipes are maintenance materials and are not "used directly" in production as an integral part of the process as required by 58-441.3(q) of the Code. An item may be essential to the business of a manufacturing operation and yet not be an immediate part of actual production. 219 Va. at 87.
Scales for Woodyards
§ 58-441.3(p), Code of Virginia, defines manufacturing as "starting with the handling and storage of raw materials at the plant site...." However, the exclusion from taxation provided under § 58-441.6 for machinery, tools or supplies "used directly" in manufacturing, does not rest solely on § 58-441.3(p). A further limitation on the manufacturing exclusion is found in § 58-441.3(q) which excludes from the "used directly" definition "ancillary activities such as general maintenance or administration."
Based on the facts presented to our auditor and in this application, our position remains that the woodyard scales are used for determination of the compensation due the suppliers, an ancillary administrative activity, and thus are taxable.
As you state in your application, this issue is one of several issues before the Virginia Supreme Court in the case of Department of Taxation v. United Coal Corporation. Please advise if you wish to file a protec-tive claim for refund on this issue pursuant to § 58-1119.1.
Sincerely
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner