Tax Type
Retail Sales and Use Tax
Description
Computer used in both manufacturing and administrative activities
Topic
Exemptions
Property Subject to Tax
Date Issued
04-23-1986
April 23, 1986
Re: §58.1-1821 Application/Sales and Use Tax
Dear ***********************
This will reply to your letter of March 11, 1986, in which you submit an application for correction of sales and use tax assessed to *********** as the result of a recent audit.
FACTS
A recent audit of ************* ("Taxpayer") produced an assessment for the taxpayer's failure to remit the sales and use tax on a leased computer used in both manufacturing and administrative activities. Tax was assessed on the full value of the computer lease payments as the preponderance of the computer's use, based upon a percentage analysis performed by the department's auditor, was in administrative activities. The taxpayer contests such assessment, contending that functions such as the purchasing and receipt of materials and the internal control of materials that were included in the computation of administrative usage in fact have a direct impact on manufacturing operations.
DETERMINATION
Section 58.1-608.1 of the Code of Virginia provides an exemption from the sales and use tax for "machinery...used directly in...manufacturing...products for sale or resale. The term "used directly" is defined in Virginia Code Section 58.1-602.22 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."
Section 630-10-63 of the Virginia Retail Sales and Use Tax Regulations further defines the term "used directly", noting that "items of tangible personal property which are used directly in manufacturing...are machinery, tools, and repair parts therefor, fuel, energy, or supplies 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.
In this case, the taxpayer uses a computer for various functions, including use in production activities qualifying for the exemption. Effective July 1, 1984, Virginia Code Section 58.1-608.1 was amended to state that "[m]achinery...and equipment...shall be exempt if the preponderance of their use is used directly in...manufacturing products for sale or resale" Therefore, effective with the date of the law change, the computer in this case will be totally exempt if it is used directly in manufacturing more than fifty percent of the time. However, if used directly in manufacturing fifty percent or less of the time the tax applies in full to the computer.
In determining the percentage of exempt usage in this case, one should not include activities such as the purchasing and receiving of materials, the internal control of materials, and other administrative activities of a similar nature. While such activities are necessary to the operation of the business as a whole, they do not touch directly on production as is necessary to gain exemption under both above statutes and regulation. As such activities are not includable in the computation of exempt usage, the preponderance of the computer's use in this case is in nonexempt activities.
Therefore, based upon the foregoing, the assessment for the period from July 1, 1984 to September 30, 1985 is proper. However, for the period prior to the July 1, 1984 law change, the usage of the preponderance of use method in assessing tax is improper. Therefore, the assessment will be revised to give the taxpayer a partial exemption on computer lease payments made prior to July 1, 1984 based upon the percentage of the computer's exempt usage.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner