Present: Hassell, C.J., Lacy, Keenan, Koontz, Kinser, and
Lemons, JJ., and Carrico, 1 S.J.
THE DAILY PRESS, INC.
v. Record No. 021107 OPINION BY JUSTICE CYNTHIA D. KINSER
February 28, 2003
CITY OF NEWPORT NEWS
FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS
H. Vincent Conway, Jr., Judge
The issue in this appeal is whether certain tangible
personal property of a newspaper publisher is “[m]achinery
and tools” and thus taxable by a locality pursuant to Code
§ 58.1-1101(A)(2), or “[c]apital” that is classified as
“intangible personal property” under Code § 58.1-1101 and
subject to taxation solely by the Commonwealth pursuant to
Code § 58.1-1100. The circuit court concluded that the
“transformation of blank paper into a readable format” as
well as “the transformation of an unrelated collection of
separate facts or impressions into a story of interest,
promotive of understanding or knowledge” is each “an
essential or indispensable function in the manufacturing
operation.” Holding that the “[m]achinery or tools used in
the preparatory stages of collecting and organizing the
information to be printed are both necessary and used in
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Chief Justice Carrico presided and participated in
the hearing and decision of this case prior to the
connection with the machinery actually used in the
manufacturing process,” the court denied the publisher’s
amended application for the correction of erroneous
assessments of property taxes. Finding error in the
circuit court’s judgment, we will reverse that judgment.
FACTS AND PROCEEDINGS
The Daily Press, Inc. applied for correction of
alleged erroneous assessments of personal property taxes
made by the City of Newport News for the tax years 1991 and
1993-1996 and a refund of the taxes paid pursuant to those
assessments in the amount of $273,928 plus interest from
the dates of payment. In 1997, the City’s commissioner of
the revenue reclassified The Daily Press from the status of
a “processor” to that of a “manufacturer.” That
reclassification is not at issue in this case. The parties
agree that The Daily Press is engaged in a manufacturing
business.
The circuit court found that The Daily Press’ business
operations can be divided into three “components” for
purposes of deciding which items of tangible personal
property are taxable by the City as “[m]achinery and tools”
pursuant to the provisions of Code § 58.1-1101(A)(2). The
first component consists of content or information
effective date of his retirement on January 31, 2003.
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gathering, the second is called the “pre-press process,”
and the final component is the actual operation of the
printing presses in the pressroom. The Daily Press
concedes that the machines and equipment in the pressroom
are used directly in the manufacturing process and are thus
taxable by the City as “[m]achinery and tools.” The
contested items are the equipment and machines used in
information gathering and pre-press activities; and include
such things as computers, servers, modems, and other
equipment linked in a local area network or “LAN” as well
as photography equipment. 2 Thus, we will focus on the first
two components or stages of The Daily Press’ operations.
The content of the newspaper published by The Daily
Press is gathered from a variety of sources, including wire
services, syndicated columnists and cartoonists,
advertisers, and The Daily Press’ own reporters. All the
content is delivered to The Daily Press in either an
electronic or tangible form. The potential content, which
includes pictures, is then stored on various computer
servers connected to the LAN, where the information can be
accessed and used by any member of the newspaper’s
editorial staff.
2
The contested items are specifically identified on
Plaintiff’s Exhibit 4.
3
The Daily Press’ staff then determines what content
will be used in the newspaper on a given day and where each
item will be located within the newspaper itself. The
latter process is accomplished on a page-by-page basis by
one of two methods. A page of the newspaper can be
composed by transferring electronically stored information
from a computer server into the image of the newspaper page
on a computer screen. Once the page is composed on the
screen, it is either printed onto paper, which is
photographed to create a negative, or used to create a
negative electronically. An alternative method used during
the relevant tax years involves manually pasting a paper
copy of each item onto a board in the shape of a newspaper
page and then photographing that board to create a
negative.
The final step during the pre-press process occurs
when the negative of each page is used to cast an image
onto an aluminum press plate. Then, a machine punches
holes in the press plate and bends it so that it will fit
properly on a printing press cylinder. The press plate is
subsequently hand-carried to the pressroom where it is
mounted on the printing press. Using the press plate, ink
and other materials, and the printing press, The Daily
Press’ newspaper is finally created by a process called
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“offset printing.” In addition to its own newspaper, The
Daily Press also prints newspapers for other publishers,
fliers for various advertisers, and other publications such
as course schedules for universities.
The Daily Press argued before the circuit court, as it
does here, that the equipment and machines used in the
first two stages of its operations, while supportive of the
manufacturing process, are not directly used in the
manufacturing of its product, nor are they used in
connection with the operation of any machinery actually and
directly used in the manufacturing process. In contrast,
the City asserted that The Daily Press has an integrated
manufacturing process that begins with the gathering of
news and ends with the printed newspaper. Thus, the City
argued that the equipment and machines used in the first
two stages of The Daily Press’ operations are just as
critical to the manufacturing process as the printing
presses. The City makes the same arguments on appeal.
Citing the decision in Concord Publishing House, Inc.
v. Director of Revenue, 916 S.W.2d 186 (Mo. 1996), and
considering the evidence presented, the circuit court
opined that “the very nature of the modern, highly
integrated and synchronized manufacturing processes
involved in this case precludes the drawing of artificial
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and arbitrary restrictive boundaries by segmenting the
process into theoretically distinct stages.” Instead, the
court concluded that the manufacturing process did not
begin when the aluminum plate was used to make an image on
paper but started with the “editing and arranging functions
made to the initial material or information.” In the
court’s words, “[t]he computer of the editor who studies,
rewrites and finally approves the content and authorizes
[a] story’s printing is no less involved in the
manufacturing process than the machine which holds the roll
of paper and feeds it to the printer.” Thus, the court
held that the taxes were properly assessed and collected.
The Daily Press appeals from the circuit court’s judgment.
ANALYSIS
Application of the provisions of Code §§ 58.1-1100 and
–1101 involves a mixed question of law and fact. See Smyth
County Comm. Hosp. v. Town of Marion, 259 Va. 328, 336, 527
S.E.2d 401, 405 (2000). On appeal, we review a mixed
question of law and fact de novo by giving deference to the
trial court’s factual findings in order to review the
court’s application of the law to those facts. Caplan v.
Bogard, 264 Va. 219, 225, 563 S.E.2d 719, 722 (2002). In
this case, the facts are essentially undisputed.
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As the parties stipulated, The Daily Press is engaged
in a manufacturing business. Consequently, its “[c]apital
which is personal property, tangible in fact, used in
manufacturing” is classified as “intangible personal
property” pursuant to Code § 58.1-1101 and is subject to
taxation only by the Commonwealth under the provisions of
Code § 58.1-1100. However, “[m]achinery and tools, motor
vehicles and delivery equipment of such businesses shall
not be defined as intangible personal property . . . and
shall be taxed locally as tangible personal property.”
Code § 58.1-1101(A)(2), see also Code § 58.1-3507(A).
Stated differently, the provisions of Code §§ 58.1-
1100 and –1101(A)(2) prohibit a locality from assessing a
personal property tax upon property classified as
“intangible personal property.” City of Winchester v.
American Woodmark Corp., 250 Va. 451, 456, 464 S.E.2d 148,
151 (1995). Thus, the City may tax the contested items
only if they fall within the exception carved out in Code
§ 58.1-1101(A)(2) for “[m]achinery and tools.” We have
interpreted Code §§ 58.1-1100 and –1101(A)(2) as general
tax statutes that must be construed against the government
and in favor of the citizen. Id., 464 S.E.2d at 152.
The definition of the term “[m]achinery and tools” is
at the core of the present controversy. In American
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Woodmark, we adopted a definition of that term which had
been utilized by the tax commissioner and the Attorney
General for many years:
Since 1950, Virginia’s tax commissioner has
opined that the phrase “machinery and tools” contained
in Code § 58.1-1101(A)(2) and its precursors means
machinery used in the actual process of manufacturing.
Likewise, the Attorney General has consistently opined
that “‘machinery and tools used in a particular
manufacturing business’ are the machinery and tools
which are necessary in the particular manufacturing
business and which are used in connection with the
operation of machinery which is actually and directly
used in the manufacturing process.”
Id. at 458, 464 S.E.2d at 152 (citations omitted). As The
Daily Press correctly notes, this definition has two
components: (1) machinery that is “used in the actual
process of manufacturing;” or (2) machinery that is
“necessary in the particular manufacturing business and
which [is] used in connection with the operation of
machinery which is actually and directly used in the
manufacturing process.” Id.
We conclude that the circuit court erred in its
application of this definition. This Court has defined the
term “manufacturing” as the transformation of “ ‘new
material into an article or a product of substantially
different character.’ ” County of Chesterfield v. BBC
Brown Boveri, Inc., 238 Va. 64, 69, 380 S.E.2d 890, 893
(1989) (quoting Solite Corp. v. King George Co., 220 Va.
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661, 663, 261 S.E.2d 535, 536 (1980)). The evidence in
this case demonstrates that the only place where
“manufacturing” occurs is in the pressroom. There, a
printing press, using ink, a water fountain solution mix,
and the aluminum press plate, transforms a news print roll
weighing approximately 2000 pounds into a newspaper. The
machines and equipment used to gather and store the news
and advertisements, to determine the content of the
newspaper and its physical layout, and to create the
aluminum press plate, i.e., the machines and equipment
utilized in the first and second stages of The Daily Press’
operations, are not used in the “actual process of
manufacturing” nor are they “used in connection with the
operation of machinery which is actually and directly used
in the manufacturing process.” 3 American Woodmark, 250 Va.
at 458, 464 S.E.2d at 152.
The City, as did the circuit court, mistakenly focuses
on The Daily Press’ integrated manufacturing business
operations rather than on the actual manufacturing process
wherein new materials are transformed into a substantially
3
The only exception is the aluminum press plate. The
Daily Press acknowledges, and we agree, that the press
plate is used in connection with the operation of the
printing presses which are actually and directly used in
the manufacturing process. Thus, the press plate is
“[m]achinery and tools” taxable by the City.
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different product. During a colloquy with counsel for The
Daily Press, the circuit court correctly recognized that
the initial inquiry in applying American Woodmark is
determining where the manufacturing process begins and
ends. However, the court then failed to apply this Court’s
definition of the term “manufacturing.” The court
disregarded the fact that The Daily Press manufactures
newspapers, not news.
As we explained in American Woodmark, once it is
determined that a taxpayer is engaged in a manufacturing
business, a distinction must be drawn between the
taxpayer’s “[m]achinery and tools” and its “capital.”
Although American Woodmark was a manufacturing business,
its furniture, fixtures, office equipment, and computer
equipment located at its headquarters were not “[m]achinery
and tools” because those items were not “used in connection
with the operation of machinery which is actually and
directly used in the manufacturing process.” Id. at 458-
59, 464 S.E.2d at 153. The principle gleaned from American
Woodmark can be simply stated: personal property that may
be essential to the overall operations of a manufacturing
business is not “[m]achinery and tools” subject to local
taxation unless the property is actually and directly used
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in the manufacturing process where new materials are
transformed into a substantially different product or the
property is connected with the operation of machinery
actually and directly used in the manufacturing process.
The circuit court in the present case omitted the word
“operation” from much of its analysis and, instead,
concluded only that the contested items were “used in
connection with the machinery actually used in the
manufacturing process of this newspaper.”
The City, nevertheless, equates news-gathering,
writing, editing, and layout functions, in other words the
activities in the first two stages of The Daily Press’
operations, with the design and engineering activities
classified as manufacturing in Brown Boveri. The City’s
approach and its reliance on that decision misconstrue the
issue in the present case. The question in Brown Boveri
was whether the taxpayer, engaged in both manufacturing and
non-manufacturing activities, should be classified as a
manufacturer within the purview of Code §§ 58.1-3507(A) and
–3703(B)(4). 238 Va. at 65-66, 380 S.E.2d at 890-91.
Since the parties agree that The Daily Press is a
manufacturer, the issue decided in Brown Boveri is not
before us. Instead, the relevant inquiry here is whether
the contested items of tangible personal property are used
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directly in the manufacturing process and are thus
“[m]achinery and tools” taxable by the City rather than the
Commonwealth. Contrary to the City’s assertion, we did not
determine the classification of any particular item of
personal property in Brown Boveri. We decided merely that
Brown Boveri was a manufacturer and “that its machinery and
tools should be taxed accordingly.” Id. at 72, 380 S.E.2d
at 894.
Because the issues in Brown Boveri and this case are
fundamentally different, it is not appropriate here to
apply a liberal definition of the term “manufacturing” as
we did in Brown Boveri. In suggesting otherwise, the City
forgets that the public policy behind that liberal
construction, i.e., to encourage manufacturing in the
Commonwealth, is already achieved here because the parties
agree that The Daily Press is a manufacturer. Contrary to
the City’s argument, American Woodmark rather than Brown
Boveri controls the disposition of this case.
Finally, the circuit court’s reliance on the decision
in Concord Publishing is misplaced. The issue there was
whether certain computers and equipment purchased by a
publisher to implement changes in the production process
and format of a newspaper were exempt from Missouri’s sales
and use tax. 916 S.W.2d at 188. In deciding that issue,
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the court stated that “[a]lthough some courts strictly
interpret the phrase ‘directly used’ to exempt only those
machines that physically alter raw materials to a finished
product, Missouri has adopted the ‘integrated plant
doctrine,’ viewing manufacturing operations as ‘continuous
and indivisible.’ ” Id. at 191. Obviously, our definition
of the term “manufacturing” is the interpretation rejected
in Missouri. See American Woodmark, 250 Va. at 458-59, 464
S.E.2d at 153.
CONCLUSION
For these reasons, we conclude that the personal
property taxes at issue were erroneously assessed and that
The Daily Press is entitled to a refund of the taxes paid
pursuant to the erroneous assessments plus interest.
Accordingly, we will reverse the judgment of the circuit
court, and remand for correction of the erroneous
assessments, calculation of the amount of the refund and
interest due to The Daily Press, and entry of final
judgment in favor of The Daily Press.
Reversed and remanded.
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