Document Number
05-140
Tax Type
Retail Sales and Use Tax
Description
Items which are not an immediate part of actual production are not exempt
Topic
Manufacturing Exemption
Date Issued
08-25-2005


August 25, 2005



Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ******************:

This will reply to your letter in which you seek reconsideration of the Department's determination of September 14, 2004, in which the manufacturing exemption was denied for a mezzanine used in the production line of ***** (the "Taxpayer"). This letter also acknowledges receipt of the Taxpayer's payments in the amount of ***** and ***** representing payment in full of the audit assessments. I apologize for the delay in the Department's response to your appeal.

FACTS

In the Department's prior ruling, it was determined that the mezzanine is not an immediate part of the actual production. Further, because the mezzanine is used to serve other functions, e.g., for use by production assemblers, storage of materials and as a safety structure, it is not considered a component part of exempt machinery. Therefore, the Department found no basis to conclude that the mezzanine qualifies for the industrial manufacturing exemption set out in Va. Code § 58.1-609.3 2.

The Department also found the mezzanine to be analogous to the loom gantry units addressed in Public Document (P.D.) 95-43 (3/17/95). The Taxpayer, however, disagrees with the Department's comparison because there was no worker production occurring on the loom gantry described in P.D. 95-43. Instead, the Taxpayer continues to claim that its mezzanine is more like the exempt shipbuilding gantry addressed in P.D. 87-45 (2/26/87). The Taxpayer contends that the production workers on the shipping gantry are building and repairing ships much like the workers on its mezzanine are building and attaching roofs on trailers. Based on this comparison, the Taxpayer claims the mezzanine qualifies for the manufacturing exemption.

DETERMINATION

Virginia Code § 58.1-609.3 2(iii) exempts from the retail sales and use tax "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies used directly in . . . manufacturing . . . products for sale or resale."

Pursuant to Title 23 of The Virginia Administration Code 10-210-920 B 2, "[t]he term 'used directly' refers to those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration." The regulation further provides that "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 and processing even though such items may be directly attached to exempt production machinery." [Emphasis added].

Accordingly, the fact that an item is essential to production is not sufficient grounds for exemption based on the Virginia Supreme Court's holding that "essential items which are not an immediate part of actual production are not exempt." Webster Brick Company Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978). Title 23 VAC 10-210-920 B 2 specifically lists platforms as used indirectly in production and therefore taxable. Public Document 96-278 (10/15/96) reflects the Department's longstanding policy that mezzanines and catwalks used at manufacturing plant sites are used indirectly in production.

Furthermore, the Virginia courts have consistently required strict construction of tax exemptions. Based on this principle established by the courts, Title 23 VAC 10-210­540 provides that exemptions from the retail sales and use tax are strictly construed, i.e., where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption.

Based on the information provided and the doctrine of strict construction mandated by the courts, the mezzanine does not qualify for the manufacturing exemption. Accordingly, I find no basis for overturning the Department's prior determination on this matter. This letter constitutes the Department's final determination on this issue.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner



AR/52890T


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46