Tax Type
Retail Sales and Use Tax
Description
Manufacturing plants: purchase the tangible personal property tax exempt for resale
Topic
Exemptions
Manufacturing Exemption
Property Subject to Tax
Date Issued
03-07-2002
March 7, 2002
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you request a ruling on behalf of your client (the "Taxpayer"), regarding the application of the retail sales and use tax to various situations set forth in your letter. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a manufacturer of clothing for wholesale to large retailers located throughout the country. Due to the nature of the product being manufactured, the Taxpayer's manufacturing process consists of four separate facilities that specialize in a certain aspect of the garment making process, i.e., knitting, dyeing, cutting, sewing, washing, pressing and packaging.
The Taxpayer acknowledges that the manufacturing exemption is limited to items used directly in the manufacturing process and may be limited with respect to the receiving and the distribution functions. The Taxpayer also acknowledges that each separate plant site has a receiving and distribution process for work in progress between different phases of manufacturing. The Taxpayer is requesting a ruling as to the application of the manufacturing exemption to the individual plant sites as the product flows from plant to plant.
The Taxpayer is also requesting clarification on the application of the sales and use tax to shelving and signage used by retailers, the cost of which is subsidized by the Taxpayer. The Taxpayer offers a cooperative mutual fund to subsidize the cost of shelving and signage that is distributed proportionately based on the retail sales by the Taxpayer's customers.
DETERMINATION
Manufacturer Sales and Use Tax Exemption
Code of Virginia § 58.1-609.3(2) provides a sales and use tax exemption for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale."
Title 23 of the Virginia Administrative Code (VAC) 10-210-920.B(2) defines the term "used directly" as follows:
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- The term "used directly" refers to those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration.
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- The integrated manufacturing process noted above includes the production line of a plant, factory, mill, etc., starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the plant site... (Emphasis added).
Based on the facts presented in your letter, the Taxpayer's product is not completed for sale until it is conveyed to storage at the fourth and final plant site. Based on the above regulation, production continues until the product is completed for sale. In addition, the concept of an "integrated manufacturing process" would be applicable to the four separate plant sites in which work in progress flows through. This being the case, the exempt manufacturing process begins with the handling and storage of raw materials at the first plant site and continues until the final completed product is conveyed to storage at the final plant site. In other words, each plant site constitutes a separate manufacturing facility. This position is supported by Public Document (P.D.) 91-267 (10/23/91), copy enclosed. It should be noted that the exemption does not extend to transportation between the separate plant sites.
Display Shelving and Signage
The purchase of the shelving and signage is transacted in three different methods as follows:
1) The shelving and signage is ordered by the retailer in Virginia for delivery to the retailer in Virginia. The shelving and sign manufacturer bills the retailer directly and the Taxpayer reimburses the retailer for up to 50% of the cost price.
2) The Taxpayer arranges for the purchase and delivery of the shelving and signage on behalf of the retailer. The shelving and signage is delivered directly to the retailer and the Taxpayer is billed the total cost. The retailer reimburses the Taxpayer 50% of the cost price.
3) Same facts as #2 above except the shelving and signage is delivered to the Taxpayer and is subsequently delivered to the Virginia retailer. Billing remains the same as #2.
In determining the tax application to the sale of tangible personal property, the department looks at the nature of the transaction, where transfer of title and possession occurs, and whose credit is bound by the transaction.
In Scenario 1, the retailer purchases the tangible personal property, takes title and possession of the tangible personal property, and its credit is bound by the transaction. There would be no sales and use tax implications on the Taxpayer in this case. In Scenarios 2 and 3, the Taxpayer is making the purchase, either taking possession or directing the manufacturer where to ship, and the Taxpayer's credit is bound by the transaction with the manufacturer. In these two situations, the Taxpayer is actually purchasing the tangible personal property for resale to its customers. In this situation, the Taxpayer may purchase the tangible personal property tax exempt for resale. The Taxpayer would charge tax on the total charge made to the customer, not including the subsidy the Taxpayer agrees to pay.
This ruling is based on the facts as presented in your letter. Any change in facts may lead to a different result. If you should have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/30235K
Rulings of the Tax Commissioner