Tax Type
Corporation Income Tax
Description
Determination of Exempt Status
Topic
Exemptions
Date Issued
03-31-2000
March 31, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer'), for the period July 1995 through June 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, an industrial equipment manufacturer, was audited by the department. The Taxpayer maintains that the assessment of use tax on purchases of computer hardware and software and on the purchase of a bridge crane is erroneous. The Taxpayer also seeks a waiver of the penalty.
The Taxpayer states that the computer hardware and software are an integral part of its manufacturing process because they control the production process. The Taxpayer uses the bridge crane in a paint room in the production area. The Taxpayer suggests that the bridge crane and the computer hardware and software are exempt under the manufacturing exemption.
DETERMINATION
Computer Hardware and Software
Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for machinery, tools, and repair parts 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, including all steps of an integrated manufacturing or mining process but not including ancillary activities such as general maintenance or administration.' Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) provides that tangible personal property is "used directly' in manufacturing if the property is indispensable to the actual production of products for sale or resale and the property is used as an immediate part of the production process. The industrial manufacturing exemption is limited by statute to the production line of a plant. Therefore, steps that are preparatory to production are not within the scope of the manufacturing exemption.
The Taxpayer indicates that the computer hardware and software instructs and controls the production of the equipment. Title 23 VAC 10-210-920(C)(2) provides that computers used to direct or control production line operations qualify for the manufacturing exemption. However, the audit comments indicate that computer hardware and software used to control the Taxpayer's production process were not included in the audit. The computer hardware and software included in the audit are used in the Taxpayer's engineering department to produce blueprints, drawings, and similar documents. These activities occur prior to the actual production process. While essential to the Taxpayer's manufacturing process, hardware and software used by a manufacturer in preproduction activities do not qualify for the manufacturing exemption. I have enclosed a copy of Public Document 99-21 (3/4/99), which explains the department's longstanding policy.
If the Taxpayer can provide documentation showing that the audit contains computer hardware and software used to direct or control the actual production process, these items will be removed from the audit. The Taxpayer should provide this documentation within 60 days from the date of this letter; otherwise, the assessment on these items will be considered correct.
Bridge Crane
The Taxpayer uses a bridge crane in a paint room where the machinery it manufactures is painted. The bridge crane consists of steel channels bolted to ceiling supports in the Taxpayer's manufacturing facility. An air-operated hoist travels along the channels and is used to lift and move the manufactured equipment during the paint process. The purchase of the bridge crane channels was held taxable in the department's audit.
Title 23 VAC 10-210-920(C)(2) provides that steel or similar supports which are a component part of exempt production machinery and are not permanently affixed to realty are not subject to sales and use tax. The auditor has provided photographs showing that the bridge crane is not permanently attached to realty. The bridge crane is an integral and immediate part of the Taxpayer's painting process. Therefore, the bridge crane is used directly in the manufacturing process and qualifies for exemption. The purchase of the bridge crane will be removed from the audit.
Compliance Penalty
Title 23 VAC 10-210-2032(A) (copy enclosed) states that "[t]he application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio.' In second generation audits, taxpayers must achieve a compliance ratio of 60% to avoid the assessment of a use tax compliance penalty. In addition, penalty is not waived unless exceptional mitigating circumstances are presented.
For this second generation audit, the Taxpayer achieved a use tax compliance ratio of 33%. Therefore, the auditor correctly assessed penalty. Furthermore, evidence of exceptional mitigating circumstances has not been presented. Accordingly, there is no basis to waive the assessed penalty.
Summary
The bridge crane will be removed from the audit and the assessment adjusted accordingly. The Taxpayer should contact the department's ***** within 60 days from the date of this letter at ***** if it can provide the documentation discussed above. If no information is received within the allotted time, a revised assessment will be issued to the Taxpayer. The Taxpayer may also pay the revised balance due within 60 days to avoid the accrual of additional interest on the assessment. The balance ***** of may be sent to ***** in the Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, please call ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18205S
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer'), for the period July 1995 through June 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, an industrial equipment manufacturer, was audited by the department. The Taxpayer maintains that the assessment of use tax on purchases of computer hardware and software and on the purchase of a bridge crane is erroneous. The Taxpayer also seeks a waiver of the penalty.
The Taxpayer states that the computer hardware and software are an integral part of its manufacturing process because they control the production process. The Taxpayer uses the bridge crane in a paint room in the production area. The Taxpayer suggests that the bridge crane and the computer hardware and software are exempt under the manufacturing exemption.
DETERMINATION
Computer Hardware and Software
Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for machinery, tools, and repair parts 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, including all steps of an integrated manufacturing or mining process but not including ancillary activities such as general maintenance or administration.' Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) provides that tangible personal property is "used directly' in manufacturing if the property is indispensable to the actual production of products for sale or resale and the property is used as an immediate part of the production process. The industrial manufacturing exemption is limited by statute to the production line of a plant. Therefore, steps that are preparatory to production are not within the scope of the manufacturing exemption.
The Taxpayer indicates that the computer hardware and software instructs and controls the production of the equipment. Title 23 VAC 10-210-920(C)(2) provides that computers used to direct or control production line operations qualify for the manufacturing exemption. However, the audit comments indicate that computer hardware and software used to control the Taxpayer's production process were not included in the audit. The computer hardware and software included in the audit are used in the Taxpayer's engineering department to produce blueprints, drawings, and similar documents. These activities occur prior to the actual production process. While essential to the Taxpayer's manufacturing process, hardware and software used by a manufacturer in preproduction activities do not qualify for the manufacturing exemption. I have enclosed a copy of Public Document 99-21 (3/4/99), which explains the department's longstanding policy.
If the Taxpayer can provide documentation showing that the audit contains computer hardware and software used to direct or control the actual production process, these items will be removed from the audit. The Taxpayer should provide this documentation within 60 days from the date of this letter; otherwise, the assessment on these items will be considered correct.
Bridge Crane
The Taxpayer uses a bridge crane in a paint room where the machinery it manufactures is painted. The bridge crane consists of steel channels bolted to ceiling supports in the Taxpayer's manufacturing facility. An air-operated hoist travels along the channels and is used to lift and move the manufactured equipment during the paint process. The purchase of the bridge crane channels was held taxable in the department's audit.
Title 23 VAC 10-210-920(C)(2) provides that steel or similar supports which are a component part of exempt production machinery and are not permanently affixed to realty are not subject to sales and use tax. The auditor has provided photographs showing that the bridge crane is not permanently attached to realty. The bridge crane is an integral and immediate part of the Taxpayer's painting process. Therefore, the bridge crane is used directly in the manufacturing process and qualifies for exemption. The purchase of the bridge crane will be removed from the audit.
Compliance Penalty
Title 23 VAC 10-210-2032(A) (copy enclosed) states that "[t]he application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio.' In second generation audits, taxpayers must achieve a compliance ratio of 60% to avoid the assessment of a use tax compliance penalty. In addition, penalty is not waived unless exceptional mitigating circumstances are presented.
For this second generation audit, the Taxpayer achieved a use tax compliance ratio of 33%. Therefore, the auditor correctly assessed penalty. Furthermore, evidence of exceptional mitigating circumstances has not been presented. Accordingly, there is no basis to waive the assessed penalty.
Summary
The bridge crane will be removed from the audit and the assessment adjusted accordingly. The Taxpayer should contact the department's ***** within 60 days from the date of this letter at ***** if it can provide the documentation discussed above. If no information is received within the allotted time, a revised assessment will be issued to the Taxpayer. The Taxpayer may also pay the revised balance due within 60 days to avoid the accrual of additional interest on the assessment. The balance ***** of may be sent to ***** in the Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, please call ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18205S
Rulings of the Tax Commissioner