Tax Type
Retail Sales and Use Tax
Description
Tooling die charges
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
05-12-2000
May 12, 2000
Re: § 58.1-1821 Application:
Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the department's sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period July 1993 through May 1997. I apologize for the delay in our response.
FACTS
The Taxpayer manufactures component parts for its customers who use the parts in the production of their product. The manufacturer of the parts requires the creation of a tooling die which forms a wax pattern of the customer's part. The wax pattern is then used to make ceramic molds which are not reusable as they are destroyed in removing the manufactured part. The process is repeated each time a customer places an order for more parts.
The department's audit disclosed that the Taxpayer, when billing its customer for an initial production run, charges the customer for the tooling dies on a separate basis to recoup its tooling costs. The auditor assessed the tooling charges to customers as a sale of tangible personal property. The Taxpayer contends that the charges for the tooling should be exempt of the retail sales tax, as the tooling is integral to the manufacturing process.
DETERMINATION
Code of Virginia § 58.1-609.3.2 provides an exemption from the sales and use tax for "machinery or tools or repair parts therefore or replacement thereof, fuel, power, energy, or supplies, used directly in... manufacturing... products for sale or resale." The term "used directly" is defined in Code of Virginia § 58.1-602 as "those activities which are an integral part of the production of a product ... but not including ancillary activities such as general maintenance and administration."
The issue presented in your appeal was addressed by the department in Public Document (P.D.) 96-324 (11/8/96), copy enclosed. In that case, sales of printing and cutting dies by a box manufacturer who used the dies in its manufacturing process but subsequently sold them to its customers were held to be taxable. Although the manufacturer could purchase the dies or the materials used to make the dies exempt of the tax, since it used them directly in manufacturing products for resale, subsequent sales of the dies by the manufacturer were held taxable because they constituted retail sales to customers who were not actually using the dies in an exempt manufacturing process or for some other exempt purpose. See also P.D. 00-59 (04/26/00), which addresses the issues of manufacturing and the sale of tangible personal property.
In the instant case, the tooling at issue is sold to customers who are industrial manufacturers. It is my understanding that these customers, however, do not use the tooling in their manufacturing processes. I also note that even though ownership of the tooling is transferred to the customers at the time of sale, the Taxpayer retains or stores the dies on behalf of its customers for potential future use by the Taxpayer in manufacturing additional products for its customers. As the Taxpayer's customers are not the ones actually using the tooling in an exempt manufacturing process, the industrial manufacturing exemption does not apply to the tooling sold to customers. As a result, and absent an exemption prior to July 1, 1999 allowing the Taxpayer to make exempt sales of the tooling to its customers, the assessment of tax on the tooling charges is proper.
The 1999 General Assembly passed legislation (HB 1820 and SB 774) that excludes from the retail sales and use tax those charges for tooling, machinery, or equipment (including dies, molds and patterns) where title is transferred by a manufacturer to its customer after use by the manufacturer directly in the production of a product for the customer. See Code of Virginia § 58.1-602, copy enclosed. However, this exclusion, effective July 1, 1999, was not made retroactive and does not apply to the audit period at issue.
Based on all of the foregoing, the assessment as issued is deemed to be correct. However, based on the time it has taken to resolve this matter, l will agree to waive the interest accrued from the date of assessment. Please return your payment for the balance of tax and interest totaling $***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 45 days from the date of this letter. If payment is not received within that time, interest will accrue on the balance due from the original date of the assessment. If you should have any additional questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12838Q
Rulings of the Tax Commissioner