Tax Type
Retail Sales and Use Tax
Description
Printing; Photocopier
Topic
Taxability of Persons and Transactions
Date Issued
09-18-1997
September 18, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to **********(the Taxpayer) for the period November 1993 through October 1996.
FACTS
The Taxpayer is in the business of providing document reproduction and copy services. The Taxpayer provides services such as document enlargements and reductions, photographic reproductions and restorations, photocopying of documents and blueprints, digital printing, and color copying. The Taxpayer was audited and assessed the tax on untaxed sales and purchases.
The Taxpayer believes that its business should be classified as industrial manufacturing and not as a retail copy center. Advances in technology have changed the nature of this business to an industrial enterprise. As a result, the Taxpayer protests three issues raised in the audit, each of which will be addressed below.
DETERMINATION
Code of Virginia § 58.1-609.3(2)(iii) provides 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 processing, manufacturing, refining, mining, or converting products for sale or resale..." The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276,199 S.E.2d 511 (1973), determined that the exemption cited above applies to establishments manufacturing in the industrial sense only. Code of Virginia § 58.1-602 provides, in part, that the term "industrial in nature" includes, but is not limited to, "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual for 1972 and any supplements issued thereafter."
Title 23 of The Virginia Administrative Code (VAC) 10-210-920(B)(1) explains that the manufacturing exemption does not apply to retail or service businesses engaged in manufacturing or processing tangible personal property as an incidental part of their business. However, Code of Virginia § 58.1-609.3(11) does provide a retail sales and use tax exemption for "high speed electrostatic duplicators or any other duplicators which have a printing capacity of 4,000 impressions or more per hour purchased or leased by persons engaged primarily in the printing or photocopying of products for sale or resale."
Digital Printing System: The digital printing system makes documents such as posters, banners, graphs, etc. by scanning the original from a computer disk, modem, or hard copy provided by the customer. The Taxpayer believes that this operation qualifies as manufacturing, and the purchase of the digital printing system and related equipment is exempt.
An on-site examination by the auditor and information provided in the Taxpayer's product and services brochure reveals that the digital printing system is a high technology photocopying process utilizing computers and printers. A review of the Standard Classification (SIC) codes reveals that the Taxpayer's business is classified in SIC sub-group 7334 which categorizes businesses engaged in commercial photocopying and duplicating as service providers.
Further, as provided under the regulation cited above, establishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities. See the enclosed Public Documents 96-386 (12/23/96) and 97-122 (3/10/97). In this case, the Taxpayer's primary activity with respect to digital printing involves sales directly to end users for their own use and consumption. While the Taxpayer may argue that the technology with respect to digital printing renders its business a processing operation, the digital printing activity does not satisfy the industrial in nature requirement and does not enjoy the manufacturing exemption. The department's position is supported by the above statute and regulation and by the Virginia Supreme Court decision in Golden Skillet.
Color Copying: The color copying machine makes high resolution color reproductions from printed color materials or photos, 35 mm film, or three dimensional objects provided by the customer. The color copying machine can produce reductions or enlargements of originals and also has manipulation of color and image capabilities. The Taxpayer contends that the color copying equipment is used directly in manufacturing activities; therefore, the purchase of the equipment is exempt from the tax.
As mentioned above, the Taxpayer's business is classified in SIC sub-group 7334 which categorizes businesses engaged in commercial photocopying and duplicating as service providers. Accordingly, the Taxpayer's operation is not "industrial" in nature but instead is primarily engaged in copying and duplicating activities that do not qualify for the manufacturing exemption. It is also my understanding that the copier would not qualify for exemption under Code of Virginia § 58.1-609.3(11) as it is not a high speed electrostatic duplicator.
Maintenance agreements: The application of the tax to maintenance contracts is set forth in Title 23 VAC 10-210-910. The regulation provides that contracts which provide both repair or replacement parts and repair labor represent a sale of tangible personal property and are subject to the tax. Code of Virginia § 58.1-609.5(9) provides that effective January 1, 1996, maintenance contracts which provide for both repair or replacement parts and repair labor are subject to tax based on one-half of the total charge for such contracts. A maintenance contract providing only for the provision of labor is exempt.
Generally, the application of the tax to maintenance contracts will follow the same application of the tax to the equipment for which such contracts are intended. In this case, the maintenance contracts are for the digital printing system and color copying machine discussed above for which no manufacturing exemption exists. Because they call for the provision of parts and labor, and because the photocopiers are deemed to be taxable, the maintenance contracts are also taxable.
However, the Taxpayer points out that a maintenance agreement for its high speed copier was held taxable in the audit. It is my understanding that the copier has a printing capacity of 4,000 impressions or more per hour and qualifies for exemption under Code of Virginia § 58.1-609.3(11). As such, the audit will be revised to remove the tax and interest assessed on this maintenance agreement.
Summary: The audit will be revised according to the determination in this case. The Taxpayer will receive an updated bill with interest accrued through the date of this letter. If you have any questions, please contact ******in the Office of Tax Policy at******* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12695T
Rulings of the Tax Commissioner