Case Title: The Daily Press Inc. v. City of Newport News

Citation: 

Docket Number: 021107

State: virginia

Court: Virginia Supreme Court

Date: 2003-02-28T00:00:00Z

Document:
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 
                                                          
 
 
1 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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