Tax Type
Retail Sales and Use Tax
Description
Multifaceted business; manufacturing
Topic
Accounting Periods and Methods
Exemptions
Date Issued
09-08-2004
September 8, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the audit period November 1997 through November 2001. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a multifaceted business engaged in manufacturing specialty papers and advanced fiber web materials. At issue is the tax assessed on the purchase of a kiln jacking device. The kiln jacking device is a hydraulically operated system attached to exempt production equipment. The kiln jacking device is used to keep the lime kiln rotating in the event of a failure to the main drive system. The Taxpayer maintains that the kiln jacking device is exempt of the tax because it allows the lime kiln to continue production by running on an alternate back-up system. The Taxpayer also claims that the kiln jacking device is necessary in the event of an electrical or mechanical failure because the lime kiln needs to rotate in order to prevent permanent warping damage to the shell from thermal distortion.
DETERMINATION
Virginia Code § 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in ... manufacturing ... products for sale or resale." This statute further provides that "[m]achinery, tools and equipment, or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is directly in ... manufacturing ... products for sale or resale."
Virginia Code § 58.1-602 defines the term "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." As further clarification, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 provides the following:
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- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts thereof, 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. Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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. [Emphasis added.]
In Public Document 87-45 (2/26/87), the Tax Commissioner determined that diesel generators used to provide emergency back up power to exempt production equipment are exempt from the tax. In the instant case, the contested kiln-jacking device is necessary to operate exempt equipment in the event of electrical outages or a mechanical failure of the equipment's main drive system. Consistent with Public Document 87-45, the kiln-jacking device is deemed to be exempt production equipment and will be removed from the audit.
Accordingly, the tax associated with the contested transaction will be removed from the assessment. Because the contested assessment has been paid, the Taxpayer will receive a refund of ***** (tax paid of ***** plus associated interest paid of *****. Interest owed by the Department on this amount will be added to the refund.
The Code of Virginia sections, regulations and public documents cited are available on-line 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
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AR/42350T
Rulings of the Tax Commissioner