Tax Type
Retail Sales and Use Tax
Description
Broadcasting equipment; Cable television
Topic
Taxability of Persons and Transactions
Date Issued
10-12-1990
October 12, 1990
Re: §58.1-1821 Application/ Sales and Use Tax
Dear***************
This will reply to your letter of January 23, 1990, seeking the correction of a sales and use tax assessment issued for the period December, 1986 through September, 1989.
FACTS
************** (Taxpayer) is an operator of a cable television system. An audit of the Taxpayer by the department held the Taxpayer liable for the sales and use tax on various purchases of tangible personal property.The Taxpayer contests the application of the tax to certain power supply equipment, backup batteries, equipment racks, hand held remotes, and computer equipment. The Taxpayer contends that such items qualify for exemption from the sales and use tax as amplification, transmission or distribution equipment under Virginia Regulation (VR) 630-10-88. Further, citing the manufacturing and processing exemptions set forth in VR 630-10-63, the Taxpayer contends that computer equipment which it uses both in taxable and exempt functions should be totally exempt as the preponderance of the equipment's use is in exempt activities.
DETERMINATION
§58.1-608(6)(b) of the Code of Virginia provides an exemption from he sales and use tax for:
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- Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, cable television systems, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by cable television systems.
Interpreting the statute, Virginia Regulation (VR) 630-10-88 provides in pertinent part that:
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- The tax does not apply to broadcasting, amplification, transmission, and distribution equipment and parts and accessories thereto and towers purchased for use by cable television systems.
Based on these authorities, I will set forth below the application of the tax to the contested items in the order presented in the Taxpayer's protest.
Computer Equipment
The computer equipment is used both to control the distribution of cable signals (an exempt activity) and invoice customers for cable services (a taxable administrative activity). Based on information submitted by the Taxpayer to the department subsequent to the audit, the computer is used approximately 58.12% of the time for the exempt functions and the remainder of the time for taxable administrative functions.
The computer equipment in question here would not be totally exempt of the tax; rather, it would be exempt only to the extent used in exempt activities (58.12%). The manufacturing and processing exemptions set forth in VR 630-10-63 and cited by the Taxpayer are inapplicable in this case as the Taxpayer is not an industrial manufacturer or processor within the meaning of the Virginia Retail Sales and Use Tax Regulations. Such businesses must manufacture or process products for sale or resale and the production must be "industrial in nature," as defined in VR 630-10-63 and §58.1-602 of the Code of Virginia--See Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973) and Commonwealth v. Orange-Madison, 220 Va. 655, 261 S.E.2nd 532 (1980).
Power Supply Equipment and Backup Batteries
The power supply equipment functions as a transformer to convert the high electrical voltage provided by a commercial power source down to the 60 volts required to distribute the cable signal. The equipment also houses batteries that provide a temporary power source to keep the system operating if commercial electric power service is interrupted. The power supply equipment and backup batteries are placed at various points along the cable distribution system to feed power over the cable for distribution of the cable signal and are used directly in the distribution process. As such, I find that the power supply equipment and backup batteries qualify for exemption under Virginia Code §58.1-608(6)(b). These items will be removed from the department's audit.
Equipment Racks
The Taxpayer asserts that the broadcasting equipment in its headends is mounted in racks and that such racks qualify as broadcasting equipment or accessories to such equipment.
The department has previously held that cabinets and racks which hold equipment used for broadcasting do not qualify for the exemption set forth in the above statute and regulation (P.D. 84-58, copy attached). The exemption is deemed to apply only to broadcasting equipment and accessories to such equipment which are used directly in broadcasting. Cabinets and racks which hold such equipment are not broadcasting equipment or accessories to such equipment as they do not play a direct role in broadcasting, amplification, transmission, or distribution. Rather, they are furniture items which are used only indirectly in such activities.
Hand Held Remotes
While subscribers can use the set top converters to change TV channels, the Taxpayer also offers hand held remote control units as convenience items to permit subscribers to change channels remotely.
The department has consistently held that operators of cable television systems are subject to the sales and use tax on their purchases of hand held remotes (P.D.'s 87-208, 88-230, 89-135, and 90-48, copies attached). Hand held remotes are not necessary for subscribers to receive cable television programming. The sole purpose of the remotes is to permit subscribers to change channels more conveniently. Such items do not qualify for exemption as equipment, or parts and accessories thereto which are used by a cable company to transmit or distribute signals. I find that the remotes were correctly held taxable in the audit.
The audit will be revised as soon as practicable to reflect the determination reached in this letter.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner