04-70 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturer of dry masonry products; manufacturing exemption

Topic

Accounting Periods and Methods

Exemptions

Date Issued

08-24-2004

August 24, 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 period October 1998 through September 2001. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a manufacturer of dry masonry products. The Taxpayer custom blends dry mortar ingredients, including sand and any color pigments or admixtures, and packages the dry mortar in 3,000 pound bags for sale. The Taxpayer also has available portable silos that can be delivered to the customer's job site for use in mixing the mortar. At issue in this case is the assessment of use tax on the portable silos.

The Taxpayer maintains that the silos are rented to customers. Alternatively, the Taxpayer maintains that the portable silos are a part of the integrated manufacturing process and qualify for the manufacturing exemption. The Taxpayer cites Public Documents (P.D.) 95-140 (5/31/95) and 92-107 (6/24/92) in support of its position.

DETERMINATION

Manufacturing Exemption

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 replacement thereof, fuel power, energy, or supplies, used directly in processing, manufacturing, refining, mining, or converting products for sale or resale.

Virginia Code § 58.1-602 defines "manufacturing" to include "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...." (Emphasis added).

Virginia Code § 58.1-602 defines the term "used directly," in relation to the above exemption, to mean "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance and administration." Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) interprets both of the above statutes, stating the following:

- Items of tangible personal property which are used directly in manufacturing . . . are machinery, tools and repair parts therefor, fuel 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. (Emphasis added).

With the foregoing in mind, I cannot agree that the portable silos in this case qualify for the manufacturing exemption. The portable silos are not used at the plant site, nor are they used directly in the production of the dry mortar for sale or resale. Rather, the portable silos are used by the customer at the job site to mix the dry mortar with water to meet desired consistency for use in the construction project. In P.D. 95-140, the silos were deemed used directly in manufacturing because they were used to store raw materials at the plant site. In the instant case, however, the manufacturing process is complete at the Taxpayer's plant site where the product is packaged for sale. Therefore, the exemption is not available to the silos used in this manner.

Rental Agreement

Virginia Code § 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines the term "lease or rental" to mean "the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property." (Emphasis added).

You suggest that the provisions of P.D. 92-107 apply to this case. In that determination, the taxpayer included the charge for the equipment in the cost of the chemicals for bidding purposes. For the equipment to be removed from that audit, the taxpayer had to prove that the cost of the equipment was included in the bid. That is not the situation in this instance because the Taxpayer clearly sets out the charges regarding the materials and equipment rental.

More to the point, P.D. 92-107 upheld the assessment associated with equipment that the customers believed they were getting for free. While the Taxpayer maintains that the rental of the portable silo is included in the premium price of the materials, invoices clearly show that the portable silos at issue are provided to customers at "no charge." Further, I note that the Taxpayer's rental agreement provides that the rental fee for the portable silo will be waived for each week materials are purchased for the silo. This would support the fact that the portable silo is provided to the customer for free and not included in the price of the materials.

Based on the information provided, it appears that the portable silos are used for dual purposes: for rentals and for use by the Taxpayer when withdrawn from rental inventory and provided to customers at no charge. As such, the sales tax application is determined based upon the particular use of the property at the time of varying uses. The Taxpayer is required to remit use tax to the Department when a portable silo is withdrawn from rental inventory and used on a "no charge" basis. When the portable silo is returned to the rental inventory, the tax must be collected and remitted based on the lease proceeds. The Department's position in this case is consistent with the Department's long-standing policy as set out in P.D. 91-312 (12/30/91) on the tax application to rental equipment later put to a different use.

The auditor assessed the tax on the portable silos removed from the Taxpayer's rental inventory and provided to its customers on a "no charge" basis. In this instance, the Taxpayer is the taxable user and ultimate consumer of the equipment in question. Therefore, I find the assessment is correct.

A revised bill, including interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days from the date of this letter. Please return your payment the Department's Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia, 232181880, Attention: *****.

The Code of Virginia, regulation 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 questions regarding this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/38261T

Rulings of the Tax Commissioner