Tax Type
Retail Sales and Use Tax
Description
Quality Control Device; Is it part of the Manufacturing Process
Topic
Exemptions
Property Subject to Tax
Date Issued
12-07-2001
December 7, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period May 1997 through February 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of fiberglass fabric that is used by other manufacturers of electronic products. As a result of the department's retail sales and use tax audit, the Taxpayer was assessed tax on Elbit Vision System (EVS) equipment the Taxpayer had purchased during the audit period. The EVS consists of computers and cameras. The function of the EVS equipment is to scan and take pictures of the Taxpayer's product during the finishing and grading process to determine the grade of the product and to detect and mark any flaws there may be in the final product. Only selected rolls of products are inspected using the EVS.
The EVS allows the Taxpayer to grade its product more quickly, thus enabling the Taxpayer to almost double its production. The photographs made by the EVS are maintained by the Taxpayer for three to five years for quality assurance purposes and are made available to customers to ensure the product meets specifications. While the Taxpayer agrees that the EVS equipment does not control the production process, you believe that the EVS equipment is used directly in manufacturing to increase production and to assure greater quality control over the product being produced. The Taxpayer requests that the EVS equipment be removed from the audit findings.
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 manufacturing... products... for sale or resale." (Emphasis added). 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 ancillary activities such as general maintenance or administration."
As provided above, in order to qualify for the manufacturing exemption, the machinery or equipment must be used directly in the production process. Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B) interprets the term "used directly" to mean that the machinery, equipment or activity must be indispensable to the actual production process and it must be used as an immediate part of the production process.
As noted in your letter, you agree that the EVS does not control any part of the production process. In fact, the production process would continue without the EVS, as it did prior to acquiring the EVS. As such, the EVS is not directly used in the production process and does not enjoy the exemption under Code of Virginia § 58.1-609.3(2).
With regard to the quality control issue, Title 23 of the Virginia Administrative Code (VAC) 10-210-920.C(2) addresses taxable and exempt manufacturing activities and provides, in part, that "equipment used for production line testing or quality control is classified as exempt production equipment. Testing for the purpose of approving administrative efficiency or any other testing not relating to quality control is taxable." This section goes on to give examples of exempt items, including:
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- Computer hardware and software used to direct or control... quality control operations (as contrasted to computer hardware and software used merely to monitor production operations, e.g., computers used to produce production reports, make production information available to plant personnel, monitor the efficiency of production machinery, etc., which are deemed to be taxable administrative items).
The EVS does not direct or control quality control operations. The EVS is used as an administrative tool to allow production line personnel to grade finish products for marketing purposes and as an information source that allows customers to identify flaws or defects in the final product. Like the manufacturing process itself, equipment used in the quality control function must be used directly to influence or control the quality of the product being produce. In the present situation, the EVS merely records, by way of photographs, the quality of the finished product without ensuring the integrity of the product being produced.
The department's policy on this issue is well established. See, for example, Public Document 01-50 (April 26, 2001), copy enclosed. Based on the above, I find that the EVS equipment is not used in the quality control function and, therefore, does not qualify for the manufacturing exemption.
Accordingly, I find no basis for revising the audit findings. Please remit a check in the amount of ***** within 30 days from the date of this letter to avoid the accrual of additional interest. Your check may be sent to ***** Office of Policy and Administration, Policy Development, P.O. Box 1880, Richmond, Virginia 23218-1880. If you should have any questions regarding this determination, you may call ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/29915K
Rulings of the Tax Commissioner