Sales Tax State Activity Update - April 2005

Virginia Ponders Prototype Taxability

A Ruling of the Tax Commissioner determined that the purchase of equipment used to test prototype cellular phones was properly assessed because prototype manufacturing represents a pre-production activity and the purchase did not qualify as an occasional sale.

The producer maintains that the industrial manufacturing exemption should apply as the testing equipment was used on the production line while phones were being manufactured. The producer also maintains that the equipment is exempt because they acquired the testing equipment when they purchased a customer's manufacturing division. The producer went on to state that the customer used the testing equipment internally for its own use and not in a registered activity.

Retail sales and use tax does not apply to machinery used directly in processing, manufacturing, refining mining or converting products for sale or resale. Used directly means activities that are integral to the production of a product. Since a prototype must first be approved by a customer and then sent to another facility for mass production, it is a pre-production activity.

Any person who purchases an item in a transaction deemed an occasional sale is not liable for use tax on the purchase. The producer's customer used the testing equipment in both the manufacture of prototype and production cellular phones and held a certificate of registration. Therefore, the purchase of the equipment did not qualify as an occasional sale.

Tax was properly assessed on testing equipment used in pre-production activities. In addition, relief was not granted on the basis that the equipment was purchased in an occasional sale transaction.

View the ruling here.

(Rulings of the Tax Commissioner No. 05-21, March 2, 2005)

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