Tax Type
Consumer Use Tax
Retail Sales and Use Tax
Description
Manufactures truck parts for sale to truck manufacturers
Topic
Accounting Periods and Methods
Exemptions
Date Issued
01-13-2004
January 13, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **********:
This is in response to your correspondence requesting correction of the consumer use tax assessment issued to ********** (the "Taxpayer") for the period June 1999 through May 2001. I apologize for the delay in the Department's response.
FACTS
The Taxpayer manufactures truck parts for sale to truck manufacturers. I understand that the Taxpayer builds its own presses and certain other manufacturing equipment. The Taxpayer maintains that most of the contested items are used directly in production, either as component parts of exempt production equipment or for production line quality control. The Taxpayer maintains that these contested items are exempt from the retail sales and use tax in accordance with the industrial manufacturing exemption provided under Va. Code § 58.1-609.3(2). The Taxpayer maintains that five assessed transactions are for purchases of exempt professional services.
DETERMINATION
Generally
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 "used directly" as referring to "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 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. 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. Furthermore, the fact that the use of a particular item, such as firefighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing. [Emphasis added.]
Based on these statutes and regulations, I will address the issues raised by the Taxpayer.
Bake oven
After products are painted, they are conveyed through a bake oven for curing at a constant temperature. The bake oven is a tunnel-like compartment lined with insulated panels held in place by steel beams. The Taxpayer separately bought insulated panels, beams, and posts to build the shell of the bake oven and maintains that these items are not affixed to the realty.
The Virginia Supreme Court in Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978) and in Commonwealth, Department of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509 (1984) addresses taxable structural materials used to build a manufacturing facility and a coal tipple structure, respectively. Those structural materials are not analogous to the beams, posts and insulated panels used in the Taxpayer's bake oven. Rather, the Taxpayer's beams, posts and insulated panels are component parts of the bake oven and do not serve any other function. The oven shell encloses the heat needed to cure painted products and, thus, creates a special environment that is a necessary and an immediate part of the production process.
Accordingly, the contested beams, posts and insulated panels that comprise the shell of the bake oven are deemed used directly in production and will be removed from the audit. This is consistent with Public Document (P.D.) 88-284 (10/26/88).
Press: Floor plates, Steel, and Grout
Floor plates are the bottom part of each press and are welded to each press. Floor plates rest on the floor, are used solely as support for the presses, and are not permanently attached to realty.
Pursuant to 23 VAC 10-210-920(C)(2), "[s]teel and similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax." In P.D. 91-183 (8/26/91), the Department held that steel supports (purchased separately) are treated as component parts of exempt machinery if the supports remain tangible upon installation, are attached to exempt machinery, are used solely to support exempt machinery, and are necessary for the operation of exempt production machinery. Based on the foregoing and the facts presented, the floor plates constitute component parts of the exempt presses and will be removed from the audit.
The contested steel was used to build steel frames for the presses. These frames are attached to the presses but are not permanently affixed to the realty. Accordingly, they constitute component parts of the exempt presses and will be removed from the audit.
The contested grout is used to level the presses during installation. With the exempt machinery resting upon the grout, a tangible joint is made between the floor and press. As a type of cement or mortar, the grout attaches to the presses. Accordingly, the grout in this instance constitutes a component part of the exempt presses and will be removed from the audit.
Paint booth components
The Taxpayer maintains that it designed and built a nonstructural paint booth to protect the integrity of its manufactured products while painting them. The paint booth is also used to trap and remove paint overspray.
The contested items are clamps, hangers, frames, door hinges, steel beams, steel angles, and steel purchased by the Taxpayer. All of these components were used in the construction of a paint booth to serve as the walls, ceiling, and ceiling fan framework for this enclosure.
It is evident that the paint booth is used in the Taxpayer's production process. Unlike the bake oven, the paint booth does not create a special environment that is essential to the production process. Moreover, it has been the Department's long-standing policy to tax enclosures similar to paint booths, such as the test cells addressed by P.D. 88-70 (5/2/88) and the wash booth enclosure addressed by P.D. 92-98 (6/5/92). Accordingly, the contested paint booth components are taxable.
Bradbury software: two purchases
The contested software is used primarily to gather data in the bar-coding process for warranty purposes. I understand that the contested software does not operate or control the production process. Rather, it is the programmable logic controller located at each press that controls and directs the production presses.
As provided by 23 VAC 10-210-920(C)(2), the industrial manufacturing exemption applies to "[c]omputer hardware and software used to direct or control production line and/or quality control operations." By contrast, this regulation provides that computer software used merely to "make production information available to plant personnel" is deemed taxable. The contested software does not actually direct or control any part of the operation of the machinery or production line quality control operations and is not an immediate part of production. Accordingly, the contested software is a step removed from direct use in production and is, therefore, taxable.
The other contested software is used for preventive maintenance purposes. Pursuant to 23 VAC 10-210-920(C)(2), "[t]angible personal property used in the repair, servicing, and maintenance of production machinery" is taxable. I understand that the Taxpayer has conceded the taxability of this software.
Data collection equipment-computer hardware
I understand that this contested equipment consists of hand-held scanning equipment. Scanning guns are used to read bar codes on the product as it goes through production. This reading gathers data to document and verify the processes each part goes through for warranty purposes.
Pursuant to 23 VAC 10-210-920(C)(1), the term "administration" includes "items used in record keeping and other administrative or managerial activities, whether on or off the assembly line." Administrative items also include "computer hardware and canned software, calculators, and other items used to record the quality and quantity of work in production or goods in storage, the flow of work, and the results of inspections."
Based on the facts presented, the contested equipment is used to collect data for warranty purposes. The data collection equipment is used only in a taxable administrative capacity.
Bar-coding equipment
Bar-coding equipment embeds bar-coded labels into the Taxpayer's products. As such, these labels become a component, nonreturnable part of the manufactured product and provide a means to track future warranty problems. This equipment is also used to apply bar-coded labels to packaging. The bar-coding equipment is used on the production line at the plant site, and the product is not ready for sale or resale until the bar-coded label is affixed to the product. Accordingly, the bar-coding equipment is considered used directly in production and will be removed from the audit.
Data Collection Software
These invoices are for exempt programming and other nontaxable services performed in connection with the Taxpayer's software and hardware. Accordingly, these charges will be removed from the audit.
Mechanical desktop AutoCAD software
The Taxpayer describes this software as used to design presses, fixtures and other manufacturing equipment. The Taxpayer maintains that this software is used in exempt research and development and exempt quality control.
In regard to the quality control contention, this software is loaded on a computer located in the Taxpayer's administrative offices. Once every few weeks, the Taxpayer measures its manufactured product and enters those measurements into a computer so the AutoCAD software can verify whether the product conforms to standards of the original design. Because this property is not located on the production line and is intermittently used for quality control purposes, it cannot be considered preponderantly used for production line testing and quality control purposes. This quality control activity does not constitute research and development.
In addition to the intermittent quality control use, this software is used to design molds based on drawings furnished by customers. The Taxpayer oversees the construction of these molds that are produced by another firm. As used in this capacity, this AutoCAD software would appear to be used in a taxable engineering design capacity rather than in an exempt research and development activity. This finding is consistent with P. D. 99-8 (1/8/99).
To qualify for the research and development exemption set out in Va. Code § 58.1-609.3(5), the property must be used directly and exclusively in research and development in the experimental or laboratory sense. Pursuant to 23 VAC 10-2103071(C), research property is still eligible for the exemption if the taxable use of the property is of a de minimis nature. In this case, however, the taxable use noted above is regular and continuous and, therefore, exceeds the taxable de minimis criteria set out in 23 VAC 10-210-3071(C). Based on the foregoing, the mechanical desktop AutoCAD software is taxable.
Boiler treatment chemicals
These chemicals are used to treat water that is used to heat and cool the molds used in the manufacturing process. That water does not come into contact with the product. The Department has consistently determined that chemicals used to prevent clogging by scaling and lime buildup or otherwise used to keep the boiler running efficiently are not an immediate part of production and are taxable. See P.D.'s 85-208 (10/31/85) and 94-28 (03/02/94).
Although you indicate that Georgia sales tax was charged and paid, the invoice shows that the vendor shipped the chemicals directly to the Taxpayer in Virginia. Thus, first taxable use occurs in Virginia. No Georgia sales or use tax applies, and no credit can be given against the Virginia tax for the Georgia tax erroneously paid. Rather, the Taxpayer needs to obtain a refund from Georgia for such erroneously paid Georgia sales tax.
Conclusion
Based on this determination, the contested transactions will be removed from the assessment. This will reduce the tax portion of the assessment from*****. A consolidated bill reflecting this revision, with interest accrued to date, will be mailed shortly to the Taxpayer. The outstanding balance must be paid within 30 days from the date of this letter to avoid the accrual of additional interest and an additional 20% penalty on the tax due. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn:*****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulations and public 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 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/38682R
Rulings of the Tax Commissioner