Tax Type
Retail Sales and Use Tax
Description
Textile manufacturer; PC equipment; Packaging equipment; Dye Beck cleaner
Topic
Appropriateness of Audit Methodology
Exemptions
Property Subject to Tax
Date Issued
04-26-2001
April 26, 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 of *** (the "Taxpayer") for the period of January 1996 through December 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of textiles. The present audit of the Taxpayer entails a number of cost centers located in different areas throughout the Commonwealth. The contested areas are associated with different cost centers and will be addressed separately below.
Inspection Computer Equipment
The equipment is located at one of the Taxpayer's manufacturing facilities where the cloth is dyed and finished. During the final inspection of the cloth, computer equipment is used to record defects in the cloth for grading and pricing purposes. This information is manually entered by the inspector and the information is transferred to the customer with the product. The Taxpayer believes the manufacturing exemption provided by Code of Virginia § 58.1-609.3(2) extends to this inspection process, and the computer equipment used in recording this information should be exempt.
Packaging Equipment
The Taxpayer operates a distribution facility on the same tract of land that houses one of its manufacturing facilities. The Taxpayer uses this facility for finished goods storage not only for its manufacturing facility at that location, but also for other manufacturing facilities. The Taxpayer was assessed tax on packaging equipment located at this distribution facility. The Taxpayer believes that its products are not ready for sale or resale until they are packaged and, therefore, the packaging equipment located at the distribution facility should be exempt.
Dye Beck Cleaner
Dye becks are machines used to dye cloth at the Taxpayer's dyeing and finishing plants. When the Taxpayer changes the color of the dye being used, cleaners are used to clean the dye beck machines in order not to contaminate the new dye used in the dyeing process. In other words, these cleaners are used directly in a quality control function. The auditor agrees the cleaners used in this function are tax exempt.
The Taxpayer also uses the same cleaners to clean dye becks throughout production runs in which the same color dye is being used. This routine cleaning is necessary to prevent accumulation on the dye becks. The auditor assessed tax on 25% of the cleaner purchased, holding that it is used in routine maintenance. The Taxpayer believes that the all dye beck cleaner should be exempt, as all cleaning serves a quality control function.
Sample Period Item
The Taxpayer purchased 50-year commemorative glass sets for its employees at one of its manufacturing facilities. The Taxpayer asserts that the glass sets were a one-time purchase, which comprised over 90% of the general expense purchases deficiency found in the three-month audit sample period of October 1997 through December 1997. The Taxpayer is requesting that this purchase be treated as a one-time purchase and not extrapolated over the entire audit period.
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, etc... of products for sale or resale." (Emphasis added). Code of Virginia § 58.1-602 defines "used directly" 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). Keeping this in mind, I will address the contested areas separately below.
Inspection Computer Equipment
As provided above, in order for an item to enjoy the manufacturing exemption, such item must be used directly in the manufacturing process. The department has traditionally interpreted this to mean that the item must direct or control the production process or be integrated with the product on the production line. In this case, the computer equipment does not control or direct the production process, but merely provides information about the product for grading and pricing purposes. The department considers this to be an administrative function, and items used in an administrative function do not qualify for the manufacturing exemption in Code of Virginia § 58.1-609.3(2). Therefore, the inspection computer equipment is subject to the tax and was properly assessed by the auditor.
I have enclosed Public Document 86-46 (3/14/86), which addresses this same issue and was previously issued to the Taxpayer. The department's position with respect to the inspection computer equipment remains the same.
Packaging Equipment
The department has previously ruled on the taxable status of this facility by way of a letter dated March 9, 1981, copy enclosed. It is the department's position that despite the fact the distribution facility and the finishing facility are separately housed, they are on the same tract of land and constitute one single plant site. Therefore, based on the March 9, 1981 ruling, the manufacturing exemption would be applicable to the packaging equipment to the extent the equipment is used to package products produced at the manufacturing facility located on the same tract of land. The exemption would not be applicable for packaging products produced at other facilities.
In situations where a single piece of equipment is used in both a taxable and an exempt manner, the department uses the preponderance of use rule in determining the tax application. This rule is set forth in Virginia Administrative Code (VAC) 10-210-920.D and provides the following:
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 the tax if the preponderance of its use is in exempt production activities.
Based on all of the above, I will have the auditor revisit this issue to determine the tax application to the packaging equipment located at the distribution facility.
Dye Beck Cleaner
As provided above in Code of Virginia § 58.1-609.3(2), the term "used directly", when referring to industrial manufacturing, does not include "ancillary activities such as general maintenance or administrative." The department makes a distinction between quality control functions and general maintenance functions. In the present case, the cleaner used by the Taxpayer serves the dual purpose of ensuring product quality (changes of color during production runs) and general maintenance (machines that only dye one color).
It has been the longstanding policy of the department to allow for the pro-ration of sales and use taxes when assessing tax on fungible items such as fuel, cleaners, etc. The auditor has allowed a pro-ration of 75% exempt and 25% taxable in assessing tax on the cleaners held in the audit. If the Taxpayer can provide a more accurate or reasonable analysis of the taxable and exempt uses of the cleaners in question, I will agree to adjust the audit accordingly.
Sample Period Item
Based on the information provided in your letter, I will agree to remove the 50-year commemorative glasses from the audit sample and tax them separately as a one-time purchase for the entire audit period.
Based on all of the above, I am returning the audit to the **** for **** revisions. In addition, the auditor will contact you to obtain any documentation you may have relating to the packaging equipment and dye beck cleaner issues. Once the appropriate revisions have been made, the Taxpayer will receive a revised audit assessment. If you should have any questions regarding this determination, please contact *** Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
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 of *** (the "Taxpayer") for the period of January 1996 through December 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of textiles. The present audit of the Taxpayer entails a number of cost centers located in different areas throughout the Commonwealth. The contested areas are associated with different cost centers and will be addressed separately below.
Inspection Computer Equipment
The equipment is located at one of the Taxpayer's manufacturing facilities where the cloth is dyed and finished. During the final inspection of the cloth, computer equipment is used to record defects in the cloth for grading and pricing purposes. This information is manually entered by the inspector and the information is transferred to the customer with the product. The Taxpayer believes the manufacturing exemption provided by Code of Virginia § 58.1-609.3(2) extends to this inspection process, and the computer equipment used in recording this information should be exempt.
Packaging Equipment
The Taxpayer operates a distribution facility on the same tract of land that houses one of its manufacturing facilities. The Taxpayer uses this facility for finished goods storage not only for its manufacturing facility at that location, but also for other manufacturing facilities. The Taxpayer was assessed tax on packaging equipment located at this distribution facility. The Taxpayer believes that its products are not ready for sale or resale until they are packaged and, therefore, the packaging equipment located at the distribution facility should be exempt.
Dye Beck Cleaner
Dye becks are machines used to dye cloth at the Taxpayer's dyeing and finishing plants. When the Taxpayer changes the color of the dye being used, cleaners are used to clean the dye beck machines in order not to contaminate the new dye used in the dyeing process. In other words, these cleaners are used directly in a quality control function. The auditor agrees the cleaners used in this function are tax exempt.
The Taxpayer also uses the same cleaners to clean dye becks throughout production runs in which the same color dye is being used. This routine cleaning is necessary to prevent accumulation on the dye becks. The auditor assessed tax on 25% of the cleaner purchased, holding that it is used in routine maintenance. The Taxpayer believes that the all dye beck cleaner should be exempt, as all cleaning serves a quality control function.
Sample Period Item
The Taxpayer purchased 50-year commemorative glass sets for its employees at one of its manufacturing facilities. The Taxpayer asserts that the glass sets were a one-time purchase, which comprised over 90% of the general expense purchases deficiency found in the three-month audit sample period of October 1997 through December 1997. The Taxpayer is requesting that this purchase be treated as a one-time purchase and not extrapolated over the entire audit period.
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, etc... of products for sale or resale." (Emphasis added). Code of Virginia § 58.1-602 defines "used directly" 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). Keeping this in mind, I will address the contested areas separately below.
Inspection Computer Equipment
As provided above, in order for an item to enjoy the manufacturing exemption, such item must be used directly in the manufacturing process. The department has traditionally interpreted this to mean that the item must direct or control the production process or be integrated with the product on the production line. In this case, the computer equipment does not control or direct the production process, but merely provides information about the product for grading and pricing purposes. The department considers this to be an administrative function, and items used in an administrative function do not qualify for the manufacturing exemption in Code of Virginia § 58.1-609.3(2). Therefore, the inspection computer equipment is subject to the tax and was properly assessed by the auditor.
I have enclosed Public Document 86-46 (3/14/86), which addresses this same issue and was previously issued to the Taxpayer. The department's position with respect to the inspection computer equipment remains the same.
Packaging Equipment
The department has previously ruled on the taxable status of this facility by way of a letter dated March 9, 1981, copy enclosed. It is the department's position that despite the fact the distribution facility and the finishing facility are separately housed, they are on the same tract of land and constitute one single plant site. Therefore, based on the March 9, 1981 ruling, the manufacturing exemption would be applicable to the packaging equipment to the extent the equipment is used to package products produced at the manufacturing facility located on the same tract of land. The exemption would not be applicable for packaging products produced at other facilities.
In situations where a single piece of equipment is used in both a taxable and an exempt manner, the department uses the preponderance of use rule in determining the tax application. This rule is set forth in Virginia Administrative Code (VAC) 10-210-920.D and provides the following:
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 the tax if the preponderance of its use is in exempt production activities.
Based on all of the above, I will have the auditor revisit this issue to determine the tax application to the packaging equipment located at the distribution facility.
Dye Beck Cleaner
As provided above in Code of Virginia § 58.1-609.3(2), the term "used directly", when referring to industrial manufacturing, does not include "ancillary activities such as general maintenance or administrative." The department makes a distinction between quality control functions and general maintenance functions. In the present case, the cleaner used by the Taxpayer serves the dual purpose of ensuring product quality (changes of color during production runs) and general maintenance (machines that only dye one color).
It has been the longstanding policy of the department to allow for the pro-ration of sales and use taxes when assessing tax on fungible items such as fuel, cleaners, etc. The auditor has allowed a pro-ration of 75% exempt and 25% taxable in assessing tax on the cleaners held in the audit. If the Taxpayer can provide a more accurate or reasonable analysis of the taxable and exempt uses of the cleaners in question, I will agree to adjust the audit accordingly.
Sample Period Item
Based on the information provided in your letter, I will agree to remove the 50-year commemorative glasses from the audit sample and tax them separately as a one-time purchase for the entire audit period.
Based on all of the above, I am returning the audit to the **** for **** revisions. In addition, the auditor will contact you to obtain any documentation you may have relating to the packaging equipment and dye beck cleaner issues. Once the appropriate revisions have been made, the Taxpayer will receive a revised audit assessment. If you should have any questions regarding this determination, please contact *** Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Related Documents
Rulings of the Tax Commissioner