Tax Type
Retail Sales and Use Tax
Description
Computer used by manufacturer in both exempt and nonexempt activities
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
02-09-1987
February 9, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear*****************
This will reply to your letter of November 24, 1986, in which you submit an application for correction of sales and use tax assessed to******** as the result of a recent audit.
FACTS
*************** (Taxpayer) is engaged in the production of printed matter for sale or resale and as such is entitled to the industrial manufacturing exemptions set forth in § 58.1-608.1 of the Code of Virginia. An audit produced an assessment of sales and use tax on the taxpayer's purchase of a computer used in both exempt and nonexempt activities. As the department's auditor, based upon an analysis of terminal usage, determined the computer to be used primarily in nonexempt activities, the tax was assessed upon the full purchase price of equipment purchased on and after July 1, 1984. For equipment purchased prior to the July 1, 1984 effective date of the statutory preponderance of use test, the tax was prorated based upon the percentage of taxable usage.
The taxpayer contests the assessment on the grounds that terminals used in activities such as estimating production hours and production scheduling, assigning job numbers and other customer service functions, and the purchasing of raw materials are used to some extent in production activities. Such activities were deemed completely taxable in the auditor's analysis of terminal usage.
Alternatively, the taxpayer suggests that the price of the
computer be analyzed in conjunction with the economic justification for the purchase. For instance, to perform purely administrative tasks the taxpayer could have purchased a lesser computer for a significantly reduced costs. Instead, the taxpayer chose to purchase a system that would perform both administrative and production functions. Under such an analysis, the computer in question would be deemed primarily used in production activities.
DETERMINATION
The application of the sales and use tax to a computer used in both taxable and exempt activities by an industrial manufacturer was set forth in an April 23, 1986 determination, a copy of which is enclosed for your review. In that determination. production related activities such as the purchasing and receipt of materials and the internal control of materials were deemed to be nonexempt in nature.
Applying the reasoning set forth in my April 23. 1986 determination to this particular case, I find the taxpayer's estimating, customer service, and purchasing activities to be nonexempt in nature. In so finding, it is important to point out that these activities may have a great amount of bearing on the production process and the operation of the business as whole, but they do not touch directly on production as is required for exemption under §58.1-608.1 of the Code of Virginia and Virginia Regulation 630-10-63.
As to the alternative approach suggested by the taxpayer, it must be remembered that the preponderance of use test set forth in §58.1-608.1 of the Code of Virginia applies to the actual "use" of an item of tangible personal property. While an interesting concept, the alternative approach does not reflect the true administrative and production usage of the computer in question. Also, some of the "production" functions included in the alternative analysis were found above to be nonexempt in nature.
Therefore, based on the foregoing, I find no basis for the revision of the assessment issued by the department, which will remain due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner