Tax Type
Retail Sales and Use Tax
Description
Computers for textile manufacturing
Topic
Property Subject to Tax
Date Issued
03-14-1986
March 14, 1986
Re: §58.1-1821 Application/Sales and Use Tax
Dear **************************
This will reply to your letter of December 11, 1985, seeking correction of an assessment issued in the above reference case.
FACTS
In connection with its textile manufacturing business, *************** (taxpayer) purchased computers for use in its manufacturing process. The computers in question are used by taxpayer to monitor the number of defects in fabric being produced. When one of taxpayer's plant personnel visually detects a defect in the fabric being produced, a voice command is given to the computer which records the location of the defect. The computer then grades the fabric as first or second quality, based on the total number of defects per hundred yards. The computer also produces a road map of the defects to assist taxpayer's plant personnel in cutting and pricing the fabric produced.
Therefore, taxpayer contends that its computers should not have been held subject to the tax since they are used directly in manufacturing.
DETERMINATION
§58.1-608(1) of the Virginia Code 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 processing, manufacturing, etc...of products for sale or resale." (Emphasis Added). §58.1-602(22) of the Code defines "used directly" 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.
§630-10-63(C) of the Virginia Retail Sales and Use Tax Regulations provides in pertinent part, "[c]omputer[s]...used to direct or control production line and/or quality control operations" are generally considered to be exempt production equipment. However, such computers are to be distinguished from, "computer[s]...used merely to monitor production, e.g., computers used to produce production reports, make production information available to plant personnel, monitor the efficiency of production,...etc., which are deemed to be taxable administrative items"
It is the department's understanding that the computers in the present case, while facilitative of taxpayer's production process, did not actually direct or control any aspect of such production process. Rather, the computers were used to provide statistical information to taxpayer s plant personnel to assist them in the pricing of the fabric being produced. In addition, taxpayer has not shown that the computers held subject to the tax were involved either directly or indirectly in testing or inspecting the fabric being produced. Instead, taxpayer's personnel performed the actual product inspections and then fed the results of such inspections into the computers for compilation and general record keeping purposes.
Therefore, I cannot agree with taxpayer's contention that such computers were used directly in manufacturing within the meaning of the sales and use tax law and regulations. However, if taxpayer can provide, within thirty (30) days of the date of this letter, additional information which would demonstrate that such computers actually do direct or control its production process, or that they actually perform product testing and inspection, I will consider adjusting the audit on either of these bases.
Based on all of the foregoing, while I find no basis for correction of the assessment at this time, I will abate all penalties which have been assessed upon receipt of all tax and interest due within thirty (30) days of this letter.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner