Tax Type
Retail Sales and Use Tax
Description
Industrial manufacturing exemption limitations
Topic
Appropriateness of Audit Methodology
Exemptions
Property Subject to Tax
Date Issued
11-03-2003
November 3, 2003
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **************************:
This is in response to your letter in which you seek correction of the sales and use tax assessment issued to ************* (the "Taxpayer") for the audit period of October 1, 1998 through June 30, 2001. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates an industrial laundry and rents linens, uniforms and various other items to customers. The Taxpayer also provides commercial laundry services to large hotels and hospitals. The Taxpayer contests the assessment of tax on boiler chemicals used at the Taxpayer's ***** a linen table and forklift used at the Taxpayer's ***** and a forklift used at the Taxpayer's *****.
The Taxpayer contests the audit assessments on the grounds that the tangible personal property qualifies for the exemptions provided under Va. Code §§ 58.1609.3(2) and 58.1-609.3(8). The Taxpayer maintains that the boiler chemicals qualify for exemption because they are a necessary component of its manufacturing process. In this regard, the Taxpayer maintains that the boiler chemicals reduce scaling in the boiler, thereby increasing the energy efficiency of its operation. The Taxpayer further maintains that the chemicals reduce foaming in the boiler (thus stabilizing the boiler operation), and halt erratic and nuisance shutdowns because of bouncing water levels.
The Taxpayer maintains that the linen table and forklift used at the ***** and the forklift used at the ***** qualify for exemption because they are used in the Taxpayer's production activities.
DETERMINATION
Boiler Chemicals
Virginia Code § 58.1-609.3(2)(iii) provides an exemption from the retail sales and use tax for:
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- Machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale.
Virginia Code § 58.1-609.3(8) provides an exemption from the retail sales and use tax for:
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- Tangible personal property including machinery and tools, repair parts or replacements thereof, and supplies and materials used directly in maintaining and preparing textile products for rental or leasing by an industrial processor engaged in the commercial leasing or renting of laundered textile products.
Title 23 of the Virginia Administration Code (VAC) 10-210-920(B)(2) interprets the industrial manufacturing exemption and provides that:
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- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, 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 .... [I]tems 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.
Pursuant to Va. Code §§ 58.1-609.3(2)(iii) and 58.1-609.3(8), tangible personal property must be "used directly" in manufacturing or textile product preparation or maintenance in order for the exemptions to apply. Where certain chemicals were used in connection with the maintenance and smooth operation of a boiler, the Virginia Supreme Court upheld the application of the sales and use tax finding that while such chemicals were essential to the taxpayer's manufacturing process, they were not an immediate part of actual production. Webster Brick Co., Inc. v. Department of Taxation, 219 Va. 81, 87 (1978). Applying the Webster decision in another case, the Department found that while blowers and cleaners were essential to the maintenance and smooth functioning of a taxpayer's boiler system, such items were not an immediate part of the production process. Rather, such items were used to keep boilers operating at their optimum level of energy efficiency and to prevent clogging or possible breakdown of the boiler system. See Public Document (P.D.) 87-176 (7/2/87) and P.D. 84-104 (7/16/84).
This same issue was addressed by the Circuit Court of the City of Richmond in B. I. Chemicals, Incorporated v. Virginia Department of Taxation, Case No. LW-111-11 (1994) (copy enclosed). The issue in B. I. Chemicals was whether the purchase and use of additives necessary for a manufacturer's cooling system were exempt from Virginia sales and use tax. In that case, the taxpayer contended that the manufacturing process could not operate without additives to the water to make a cooling mixture. The Court found that because the additives did not "enter into the production," the taxpayer was not entitled to an exemption.
Based on the Department's long-standing policy with respect to this issue, as upheld by the Virginia courts, the contested boiler chemicals do not qualify for the industrial manufacturing exemption. The chemicals serve a general maintenance function by reducing scaling in the boiler to increase efficiency. The chemicals are not used directly in the Taxpayer's industrial process and do not enter into the production of the product. Thus, the industrial manufacturing exemption does not apply.
Linen Table and Forklifts
Virginia Code §§ 58.1-609.3(2)(iii) and 58.1-609.3(8) require that tangible personal property be used directly in the Taxpayer's industrial process in order to qualify for the industrial manufacturing exemption. Virginia Code § 58.1-602 defines manufacturing and processing as:
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- [T]he production line of a 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, and also includes equipment and supplies used for production line testing and quality control. (Emphasis added.)
Title 23 VAC 10-210-920(B)(2) provides that tangible personal property used in activities conducted away from the plant site or used to convey products or materials between two plant sites is deemed not to be used directly in manufacturing or processing.
The Department has traditionally interpreted the statutory definition of manufacturing in Va. Code § 58.1-602 as limiting the industrial exemption to production activities conducted at a single location. See P.D. 84-79 (6/24/84). The industrial manufacturing exemption is limited to production activities conducted at a plant site for use directly in manufacturing. See P.D. 97-244 (5/27/97).
In this instance, the linen table and the forklifts are being used in activities that are conducted away from the ***** site. This situation is distinguished from that addressed in P.D. 01-50 (4/26/01). In that case, the taxpayer's distribution facility and finishing facility were housed separately, but were located on the same tract of land. The Department found that this constituted a single plant site, and that the manufacturing exemption was applicable. In the instant case, the Taxpayer's distribution facilities are not located on the same tract of land as its main plant. As such, the aforementioned items of tangible personal property are not being used directly in the Taxpayer's industrial process. The industrial manufacturing exemption is limited to production activities conducted at the***********. Accordingly, the industrial manufacturing and textile processing exemptions do not apply to the linen table and forklifts.
CONCLUSION
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessments are paid within thirty days of the date of this letter.
The Virginia Code sections, regulations and public documents cited are available 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 about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/41829P
Rulings of the Tax Commissioner