Tax Type
Retail Sales and Use Tax
Description
Videotape and computer software production
Topic
Taxability of Persons and Transactions
Date Issued
02-27-1987
February 27, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear *****************
This will reply to your letter of February 25, 1986, in which you submit an application for correction of sales and use tax assessed to ********** as the result of an audit.
FACTS
*************** (Taxpayer) is engaged in the production of video tapes and slides for sale to customers for use in presentations and for other purposes. In addition, the taxpayer engages in the production and sale of computer software packages. A recent audit of the taxpayer produced an assessment for its failure to remit the sales and use tax on cameras, video equipment, computers, and other items of tangible personal property used in producing tapes, slides, and computer software. In addition, tax was assessed on materials and supplies used or consumed in the production of tapes and slides, but which did not actually pass to the taxpayer's customers as part of the finished products.
The taxpayer contests the assessment of tax on equipment used in producing tapes, slides, and computer software, asserting that such equipment is entitled the industrial manufacturing exemption set forth in §58.1-608.1 of the Code of Virginia. In support of its position, the taxpayer notes that the business is classified as a manufacturer by the City of Richmond. In addition, the taxpayer contests the tax assessed on materials and supplies used in production that did not become components of finished products.
DETERMINATION
§58.1-608.1 of the Code of Virginia provides, in part, 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 ... manufacturing ... products for sale or resale." Reading this statute as whole, the Virginia Supreme Court stated in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), that "it is intended ... to provide exemption for machinery and tools used in ... manufacturing ... products for sale or resale only in the industrial sense."
Therefore, based on the above statute and court opinion, the taxpayer must first produce products for sale or resale and then such production must be industrial in nature in order for it to enjoy the exemption. As the taxpayer is engaged in the production of products for sale or resale to others, the first test for the exemption is met, leaving us to determine only if the taxpayer's production activities are industrial in nature.
§58.1-602.9 of the Code of Virginia and Virginia Regulation 630-10-63 both provide in effect that any business classified in codes 10-14 and 20-39 of the Standard Industrial Classification (SIC) Manual will be entitled to the industrial manufacturing exemption set forth in §58.1-608.1 of the Code of Virginia. An examination of the SIC Manual reveals that businesses of the type conducted by the taxpayer are not listed in codes 10-14 or 20-39. Rather, businesses engaged in audiovisual and training film production are classified in code 78 and businesses engaged in producing film strips and slides are classified in code 73 of the Manual.
Of course, the exemption is not limited solely to businesses classified in codes 10-14 and 20-39 of the SIC Manual. However, based on opinions of the Virginia Supreme Court in Golden Skillet and Commonwealth v. Orange-Madison, 220 Va. 655, 261 S.E.2d 532 (1980), I cannot conclude that the taxpayer's production activities are industrial in nature. In both cases, the court noted that the exemption was available "only to true manufacturers or industries" and concluded that manufacturing that was purely secondary to the retail nature of a business and the services provided by the retailer was not industrial in nature.
While the taxpayer may be classified as a manufacturer for license tax purposes by the City of Richmond, such a determination has no direct bearing on this matter. This is so because the laws permitting localities to impose license taxes refer to manufacturers in general, while the sales and use tax law refers to industrial manufacturers. Therefore, as specifically noted by the court in Golden Skillet, the sales and use tax law is more restrictive than the laws relating to license taxes.
Therefore, based on the foregoing, equipment used by the taxpayer in producing tapes and slides was properly included in the department's audit. Likewise, materials and supplies used in production were properly taxed as they do not enjoy the industrial exemption and did not actually become part of finished products so as to enjoy the resale exemption.
However, I do find basis for the relief of tax assessed on machinery, tools, supplies, etc., used directly in the production of prewritten computer software packages for sale or resale. The production of prewritten computer software for sale or resale is an activity entitled to the industrial manufacturing exemption by virtue of Emergency Virginia Regulation 630-10-49.2 (see enclosed copy), which was adopted on January 9, 1986. To assist you, I have also enclosed copies of House Bill 245 and the department's legislative impact statement on the bill. This legislation, which took effect on July 1, 1986, was enacted by the 1986 regular session of the General Assembly to effectively exempt from the tax all sales of custom computer software as well as separately stated labor or service charges in connection with the modification of prewritten computer software. Please feel free to contact the department if any questions arise on the impact of the recent software legislation on your business.
Based upon the foregoing, the department's audit will be revised to delete all machinery, tools, and supplies used directly in the production of prewritten computer software. The balance of the assessment will remain due and payable, however. A revised notice of assessment will be furnished to you as soon as practicable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner