Tax Type
Retail Sales and Use Tax
Description
Insulation installed on exempt machinery and equipment.
Topic
Manufacturing Exemption
Date Issued
05-02-2002
May 2, 2002
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to insulation used at ***** (the "Taxpayer") manufacturing facility. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a manufacturer and qualifies for the industrial manufacturing exemption for machinery and equipment used directly in its manufacturing process. The Taxpayer's manufacturing process is temperature sensitive, in that much of its equipment must maintain certain temperature levels in order to function properly. In order to achieve this, the Taxpayer installs insulation products on various component parts of its equipment. In some instances, the insulation is used to hold the heat inside the equipment and in other instances, the insulation is used to keep heat out. The Taxpayer's manufacturing process utilizes heat directly in the production of its product and also as an energy source, i.e., steam is used to power their equipment. The Taxpayer is requesting a ruling as to the application of the sales and use tax to insulation installed on exempt machinery and equipment.
RULING
Code of Virginia § 58.1-609.3 provides an exemption from the 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 .... products for sale or resale." Code of Virginia § 58.1-602 states that manufacturing and processing "includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site . . . ."
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) states that "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." This regulation goes on to provide the following:
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- Convenient or facilitative items . . . or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery.
Accordingly, the fact that an item is essential to production is not sufficient grounds for exemption, based on the Virginia Supreme Court's holding that "essential items which are not an immediate part of actual production are not exempt." Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978).
In the case presented, it must be determined if the insulation in question is "used directly" in the manufacturing process. It is apparent from your letter that heat is directly used in the Taxpayer's manufacturing process, either acting directly on the product or as an energy source. This being the case, equipment and machinery used to produce heat qualifies for the exemption because it is used directly in the manufacturing process. However, I cannot agree that insulation that is installed on exempt equipment after the equipment is acquired qualifies for the exemption. While the insulation may serve a function that is essential to the overall production process, the insulation is one step removed from actual production process, i.e., it is not being used directly in production. I would note that insulation purchased as a component part of exempt equipment would likewise be exempt. This has been the long-standing position of the department, as exhibited in Public Document (P.D.) 89-327 (11/20/89) and 98-173 (10/26/98).
Copies of the cited public documents are enclosed for reference purposes. These and other reference documents are also available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions concerning this ruling, please contact ***** in the Office of Policy and Administration, Policy Development, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/33326K
Rulings of the Tax Commissioner