Tax Type
Machinery Tools Tax
Description
Machinery & Tools directly used in the manufacturing process
Topic
Local Power to Tax
Property Subject to Tax
Date Issued
08-30-2005
August 30, 2005
Re: Request for Advisory Opinion
Machinery and Tools Tax
Dear *****:
This is in response to your letter in which you request an advisory opinion as to whether certain drying equipment used by ***** (the "Taxpayer") is subject to the Machinery and Tools ("M&T") tax.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 J 2 authorizes the Department to issue advisory opinions on local business tax matters. The following opinion has been issued subject to the facts presented to the Department summarized below. Any change in facts or the introduction of new facts may lead to a different result.
While addressing the questions raised in your letter, this response is intended to provide advisory guidance only, and does not constitute a formal or binding ruling. The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer is a manufacturer of carpet fibers. The Taxpayer's manufacturing process involves combining color pellets with various types of nylon fibers on spinning lines to make carpet fibers. One of the nylon fibers used in the process has a high moisture content and must be subjected to a drying process before it can be combined with the color pellets on the spinning lines. The drying of these fibers takes place in the Taxpayer's drying complex. Once the fibers have been dried, they are stored in a silo until such time they are used in the spinning process. The fibers cannot be used in the spinning process until such time as the excess moisture is removed.
The dried nylon fibers are produced by other manufacturers, and are available on the market. The Taxpayer states that, for business reasons, it purchases the raw moisture-laden material that must undergo a drying process at the Taxpayer's facility before it can be used in the making of carpet fibers.
The Taxpayer has requested a refund of M&T taxes paid on assessments made on the machinery used in the drying of the nylon fibers, asserting that this property is not directly used in the manufacturing process, and should be classified as intangible property, subject to state taxation only.
You ask if the machinery used in the drying process should be considered machinery and tools used in a manufacturing business and subject to the M&T tax.
OPINION
Taxation of Machinery and Tools
All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia. Included in the category of tangible property that is declared intangible and subject to state taxation only is "Capital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters)." See Va. Code § 58.1-1101 A 2 .
The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has established a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A provides:
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- Machinery and tools, except machinery and equipment used by farm wineries as defined in § 4.1-100, used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.
Machinery and Tools Used in a Manufacturing Business
In City of Winchester v. American Woodmark Corp., 250 Va. 451, 464 S.E.2d 148, (1995), the Virginia Supreme Court stated, "Since 1950, the Tax Commissioner has opined that the phrase 'machinery and tools' contained in Va. Code § 58.1-1101 A 2 and its precursors means machinery used in the actual process of manufacturing." The Court also cited previous opinions of the Attorney General in deriving the meaning of "used in manufacturing":
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- The Attorney General has consistently opined that 'machinery and tools used in a particular manufacturing business' are the machinery and tools which are necessary in the particular manufacturing business and which are used in connection with the operation of machinery which is actually and directly used in the manufacturing process. Id., citing 1985-1986 Att'y Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590.
The Taxpayer relies on both the American Woodmark case and a more recent opinion of the Virginia Supreme Court, The Daily Press, Inc. v. City of Newport News, 265 Va. 304, 576 S.E.2d 430 (2003). In Daily Press, the Court amplified the principles set forth in American Woodmark.
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- The principle gleaned from American Woodmark can be simply stated: personal property that may be essential to the overall operations of a manufacturing business is not 'machinery and tools' subject to local taxation unless the property is actually and directly used in the manufacturing process where new materials are transformed into a substantially different product or the property is connected with the operation of machinery actually and directly used in the manufacturing process. Daily Press at 311.
Based on these decisions, the Taxpayer contends that the machinery and tools used in the manufacturing process must be directly connected to the complete transformation of a material into something substantially different in character. The Taxpayer maintains that no substantial transformation of the nylon occurs in the drying complex. The moisture level of nylon fibers is reduced by passing through the drying complex, but no transformation takes place and there is no value added. As such, the Taxpayer believes that because the drying complex does not transform the fiber, it is a part of the pre-production process as defined by the Court in Daily Press. Therefore, the Taxpayer asserts that the property in the drying complex should be classified as intangible, subject only to state taxation under the provisions of Va. Code § 58.1-1101.
I disagree with this interpretation. A machine or tool does not need to be directly involved in the complete transformation of a material in order to be included in the manufacturing process. In Public Document 04-39 (8/02/2004), the Department found a number of items that did not directly transform or even touch the product being produced were used in the manufacturing process. The question, therefore, is not whether a particular piece of machinery transforms a product, but whether such machinery or tool is used directly in a manufacturing process.
In this case, the drying of the nylon fibers is the first step in the transformation of the nylon fibers into carpet fibers. The Taxpayer must subject the raw, moisture-laden nylon fibers to an initial drying process as a part of the overall manufacturing process that transforms the nylon fibers into carpet fibers. Without this step, the nylon fibers could not be transformed into carpet fibers.
The fact that the nylon fibers could have been dried at the place of their original manufacture and are available for purchase as a raw material that needs no further transformation before it can be utilized in the Taxpayer's business is not relevant. In fact, when used by the manufacturer of the nylon fibers, the drying process is clearly directly used in the manufacturing process to complete a substantial transformation of the nylon fiber. Putting the drying complex at the beginning of the Taxpayer's manufacturing process does not change its nature.
Therefore, it is my opinion that the machinery and tools used in the drying complex are directly used in the manufacturing process, and are subject to the local M&T tax.
If you have any questions regarding this opinion, you may contact ***** in the 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/56596H
Rulings of the Tax Commissioner