Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Computers Used to Monitor Production
Topic
Taxability of Persons and Transactions
Date Issued
04-14-1992
April 14, 1992
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear***************
This will reply to your letter and additional contact with my Tax Policy Division staff in which you contest a sales and use tax assessment to your company, ********* (the "Taxpayer"), for the period September 1987 through June 1990.
FACTS
The Taxpayer contests the assessments relating to the following two areas:
-
- 1 . computer equipment which it deems is used in the manufacturing process but which the auditors found to be administrative in nature, and
2 . cameras, film and chemicals for its news photo department.
- 1 . computer equipment which it deems is used in the manufacturing process but which the auditors found to be administrative in nature, and
It is my understanding that a third area listed in your letter, fixed assets transferred to the parent company, is no longer being contested.
DETERMINATION
Va. Code §58.1-608(A)(3)(b) provides an exemption from the sales and use tax for "equipment, printing or supplies used directly to produce a publication described in subdivision 4 c whether it is ultimately sold at retail or for resale or distribution at no cost...." (Emphasis added.) "Used directly" is defined in Va. Code §58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration."
Virginia Regulation (VR) 630-10-63 further explains that computers used to direct or control production lines and/or quality control operations "are generally considered to be exempt production equipment." However, such computers are distinguished from computers used merely to monitor production operations, e.g., computers used to produce production reports, make production information available to plan personnel, monitor the efficiency of production machinery, etc.
It is the department's understanding that the computers in the instant case, while facilitative of the Taxpayer's production process, do not actually direct or control any aspect of such production process. Rather the computers are used to track newspaper and insert production counts and the movement of papers from the press to ultimately the shipping/distribution dock. Accordingly, the computers were properly held taxable in the assessment. However, if the Taxpayer can provide additional information which will demonstrate that the computers are involved directly in the production process, I will consider adjusting the assessment.
VR 630-10-63 provides further that tangible personal property used in activities conducted away from a plant site is deemed not to be used directly in manufacturing or processing. Accordingly, and consistent with the circuit court decision in Charlottesville Newspaper, Inc., T/A The Daily Progress v. Commonwealth of Virginia (1979), cameras and supplies used by reporters in the field are deemed to be taxable since such news gathering activities do not occur at the plant site. However, cameras and supplies used within the Taxpayer's plant are nontaxable. The department's policy with regard to cameras and supplies has been consistent for a number of years. However, its tax treatment of items used in both taxable and exempt activities has changed.
Prior to a 1984 law change, if the same piece of equipment, or, as in the instant case, cameras and supplies, were used in both taxable and exempt activities, the exemption was prorated based upon the usage of the individual item. However, in 1984, the preponderance of use test which provides that property becomes taxable or exempt based upon whether 50% or more of its use is in a taxable or exempt manner, was adopted by the General Assembly. Thus, in the instant case, if the same cameras and supplies are used both within and outside the Taxpayer's plant, the taxability of such would be determined by the preponderance of use tax.
Since I do not have sufficient information in order to make a determination with respect to the camera and supplies issue, I am referring this matter back to the **********District Office for a final determination consistent with the above-stated policy.
With regard to the penalty issue, VR 630-10-80 provides that penalties will not be waived on second or subsequent audits for other than exceptional mitigating circumstances. This is the third audit of the Taxpayer. While I recognize the Taxpayer's favorable record for reporting and payment of sales tax due during the audit period, I must also recognize its failure to report and remit payment of use tax on a majority of its purchases. Although no penalty was applied to the sales tax portion due to the high level of compliance, penalty was assessed on the use tax portion since the use tax compliance ratio was only 2%. Thus, in spite of the Taxpayer's contention that it "acted in good faith based on the 1977 sales tax audit," I find no basis for abating the penalty.
Accordingly, someone in the********District office will be contacting you shortly to resolve the camera and supplies and computer issues.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/4788H
Rulings of the Tax Commissioner