04-130 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

All items used directly in an industrial manufacturing process

Topic

Accounting Periods and Methods

Manufacturing Exemption

Date Issued

09-16-2004

September 16, 2004

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 retail sales and use tax assessment issued to ***** (the "Taxpayer") for the audit period of September 1997 through December 2001. I apologize for the delay in this response.

FACTS

The Taxpayer has expertise in digital imaging for the lithography, flexography, and gravure printing methodologies. The Taxpayer has two major locations in Virginia. One location manufactures printing cylinders to be used by printers in printing packaging. The other location is involved in graphics design activities, receiving computer graphics files from customers and preparing them for use in etching cylinders. Additionally, proofs are created for review by customers, the printer and the cylinder manufacturing unit. You maintain that the industrial manufacturing exemption applies to the items of tangible personal property assessed tax as a result of the audit and request abatement of the assessment.

DETERMINATION

Administrative Appeal

Virginia Code § 58.1-1821 provides that all applications to the Tax Commissioner for correction of assessments shall fully set forth the grounds upon which the taxpayer relies and all facts relevant to the taxpayer's contention. Title 23 of the Virginia

Administrative Code 10-20-160(C) further explains that such submissions must sufficiently identify the taxpayer, the type of tax, the taxable period, the remedy sought, the date of the assessment and, if paid, the date of payment, and a statement signed by the taxpayer or duly appointed or authorized agent or attorney setting forth each alleged error in the assessment, the grounds upon which the taxpayer relies and all facts relevant to the taxpayer's contention.

In this instance, the Taxpayer has not complied with the terms of Va. Code § 58.1-1821 and 23 VAC 10-20-160, in that the Taxpayer has not provided the Department with a complete appeal letter. The Taxpayer has not stated clearly the alleged error in the assessment, the grounds on which it relies, nor has it given sufficient facts relevant to its contention. For example, and as explained in more detail below, the Taxpayer has not furnished documentation to show the items at issue are used directly in an industrial manufacturing process.

Industrial Manufacturing Exemption

Virginia Code § 58.1-609.3(2) provides the terms and requirements under which an industrial manufacturer or an industrial processor qualifies for exemption. Under this statute, the exemption is available for industrial materials converted into tangible personal property for sale or resale and to machinery, tools or repair parts used directly to convert products for sale or resale. The term "used directly" is defined in Va. Code § 58.1-602 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."

There are more than 700 items held taxable by the audit staff with regard to this assessment. The Taxpayer states that the industrial manufacturing exemption should apply to all these items; however, the Taxpayer has not explained how these items are used in its facilities. In order to enjoy the industrial manufacturing exemption, the items at issue must satisfy the requirements established in Va. Code § 58.1-609.3(2) and Title 23 VAC 10-210-920 and be used directly in an industrial manufacturing process. The Taxpayer has not furnished sufficient documentation to show that each item is used in such a manner and, therefore, qualifies for the exemption.

The Department will give the Taxpayer an opportunity to comply with the provisions of Va. Code § 58.1-1821, provided that the Taxpayer does so within 45 days from the date of this letter. The appeal must include sufficient information to substantiate the Taxpayer's position that each of the items at issue is used directly in an industrial manufacturing process. Should the Taxpayer fail to comply with the terms of this determination within the allotted time, the assessment will be upheld as issued and collection action will resume on the outstanding balance.

The Code of Virginia sections and regulations cited, along with other reference documents, 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 response, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/48557P

Rulings of the Tax Commissioner