Tax Type
Retail Sales and Use Tax
Description
Is Equipment Taxable
Topic
Exemptions
Property Subject to Tax
Date Issued
09-11-2001
September 11, 2001
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek a ruling regarding the application of the retail sales and use tax to the scales department in the industrial manufacturing and processing plant operated by ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is in the poultry processing business that produces chicken and turkey products. As a part of its operation, the Taxpayer has an integrated scale department that contains many different scales used in different aspects of the poultry processing business. Many of the scales are connected to a main computer system to process the information for purposes of feed blending, sizing for customer compliance, labeling, shipping, pricing, and other functions. The scale department consists of scales, computer hardware and software, and printers. The Taxpayer seeks a ruling regarding the application of the retail sales and use tax to its scales department.
RULING
The exemption for industrial manufacturers and processors is set forth in Code of Virginia § 58.1-609.3(2) and provides, in part, that the tax does not apply to "machinery or tools or repair parts therefor 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, including all steps of an integrated manufacturing... process, but not including ancillary activities such as general maintenance or administration." (Emphasis added).
Interpreting the above statutes, § B(2) of Title 23 of the Virginia Administrative Code (VAC) 10-210-920, copy enclosed, provides:
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- 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. Convenient or facilitative items... or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing... (Emphasis added).
A review of VAC 10-210-920 reveals that manufacturing and processing activities are generally divided into three categories: Administration, Production, and Distribution. As a general rule, administration and distribution activities are taxable, while production activities are generally exempt. In the present case, the function of individual scales, computers and printers used in your scales department would need to be examined to determine the function in which they are utilized, and also if they are used directly in the production process.
Based on the information provided, it appears that scales, computers and printers in the scales department may be used in exempt production activities and also in taxable administrative activities. Title 23 VAC 10-210-920.D addresses machinery, tools, etc., used in both taxable and exempt functions and provides the following:
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- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.
I hope this information will be helpful to you in determining the tax application to the various equipment utilized in your scales department. If you should have questions relating to the application of the tax to a specific piece of equipment, or the classification of certain functions performed by a piece of equipment, please contact *****, Policy Development Office, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/27251K
Rulings of the Tax Commissioner