00-177 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Furniture manufacturer; Compressed air dryers and moisture separators

Topic

Property Subject to Tax

Date Issued

10-05-2000

October 5, 2000

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ****

This is in reply to your letter in which you seek a correction of the department's retail sales and use tax audit assessment issued to * * * (the "Taxpayer"), for the period December 1995 through November 1998. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a manufacturer of household furniture. The Taxpayer uses compressed air in its manufacturing process to power its tools and equipment. During the process of producing compressed air, moisture can occur in the air lines. Compressed air dryers and moisture separators are used to keep the air lines dry and remove the condensation. The Taxpayer contends that the equipment is used directly in the manufacturing process and, therefore, qualifies for the industrial manufacturing exemption found in Code of Virginia § 58.1-609.3(2). Accordingly, the Taxpayer requests that the equipment be removed from the department's audit.

DETERMINATION

Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel power, energy, or supplies, used directly in processing, manufacturing, refining, mining, or converting products for sale or resale." (Emphasis added).

Code of Virginia § 58.1-602 defines the term "used directly," in relation to the above exemption, to mean "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 and administration." Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) interprets both of the above statutes, stating the following:

Items of tangible personal property which are used directly in manufacturing . . . are machinery, tools and repair parts therefor, fuel energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process.

The term "used directly" has been addressed by the Virginia Supreme Court as well. The Court has ruled that the single key determination of "used directly" is that an item must be an immediate part of actual production. See Webster Brick Co. v. Department of Taxation, 219 VA. 81, 245 S.E. 2d 252 (1978). In this decision, the Court also held that "essential items which are not an immediate part of actual production are not exempt."

With the foregoing in mind, I cannot agree that the equipment at issue is used directly in the actual production process. While I certainly agree that the equipment may be essential in achieving a desired product, the equipment itself does not act upon the product, nor is it an immediate part of the actual production process. I have enclosed a copy of a previous determination, Public Document (P.D.) 96-279 (10/16/96), which further explains the department's position.

Please return your payment for the balance of the tax, penalty, interest and accrued interest related to the equipment totaling to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within that time, interest will continue to accrue on the balance due from the original date of assessment. If you should have any questions regarding this matter, please contact * * * of the department's Office of Tax Policy at * * *

Danny M. Payne
Tax Commissioner

Rulings of the Tax Commissioner