Tax Type
Retail Sales and Use Tax
Description
Tax on Tersa Bale Heads used in cigarette manufacturing business
Topic
Assessment
Manufacturing
Date Issued
08-23-2006
August 23, 2006
Re: § 58.1-1821 Reconsideration: Retail Sales and Use Tax
Dear *********:
This is in response to your letter requesting reconsideration of the Department's determination upholding the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period February 1997 through December 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer previously appealed the Department's assessment of use tax on Tersa Bale Heads used in its cigarette manufacturing business. The Taxpayer's basis for the original appeal was that the Tersa Bale Heads qualified for the industrial processing exemption. Tersa Bale Heads are plywood boards that are used to form loose tobacco into cubes or bales ("Tersa Bales.") The Department's response, published as Public Document (P.D.) 04-87 (8/30/04), stated that the Tersa Bale Heads did not qualify for the exemption. The Department determined that the storage and aging of tobacco in storage sheds at the Taxpayer's Virginia facility is not industrial processing and that this portion of the facility is not a plant site for purposes of the manufacturing and processing exemption.
In a meeting with representatives of the Department, and in correspondence submitted subsequent to the meeting, the Taxpayer has presented additional information for reconsideration by the Department. The Taxpayer states that the tobacco leaf is the primary component of its raw material inventory and its cost of manufactured goods sold. For local property tax purposes, the Tersa Bale Heads are classified as machinery and tools used by manufacturers and processors. The Taxpayer classifies itself for federal income tax purposes and under the North American Industry Classification System as a tobacco manufacturer, using business activity code 312200. In addition, the permit issued to the Taxpayer by the Department of Treasury's Bureau of Alcohol, Tobacco and Firearms states that the Taxpayer "is engaged in business as a manufacturer of tobacco products."
DETERMINATION
Industrial Processing Exemption
The Taxpayer has presented additional information demonstrating that it is a tobacco manufacturer. The Department does not dispute this fact. The Taxpayer maintains that its Virginia facility is one of three plant sites that are used to manufacture tobacco products. The first site is where a contract processor hired by the Taxpayer threshes and dries the tobacco. The contract processor, using the Tersa Bale Heads, creates the Tersa Bales out of the loose tobacco. The Tersa Bales are then transported to the Taxpayer's facility where they are stacked in storage sheds and aged. The Taxpayer maintains that the storage facility is the second plant site and that the aging of the tobacco at the site constitutes industrial processing. When aging of the tobacco is completed, the Tersa Bales are transported out-of-state to the Taxpayer's cigarette manufacturing facility, which is the final plant site.
The Department has previously recognized that industrial manufacturers and processors can have multiple plant sites where exempt manufacturing or processing activities are conducted. The fact that a site is considered a plant site does not mean that all activities conducted at the site qualify for the industrial processing exemption. The activities conducted at each site must meet certain statutory and regulatory criteria to qualify for the industrial processing exemption. A taxpayer's classification for local tax purposes or under the North American Industrial Classification System as a manufacturer or processor does not mean that all activities conducted at a particular site qualify for the sales tax exemption for industrial processing. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 discusses some of the different taxable and exempt activities that can take place at a single plant site.
Industrial processors are defined in Title 23 VAC 10-210-920 B 1 as "[e]stablishments engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable . . . ." (Emphasis added.) As the definition indicates, establishments must perform some type of treatment on the product or material to be considered industrial processors. The contract processor performs such a treatment on the Taxpayer's tobacco by removing the tobacco from the stem. The Tersa Bales merely sit in storage at the Taxpayer's facility for a specified period of time until aging is complete. Unlike the contract processor, the Taxpayer is not performing any type of treatment on the tobacco.
In its previous determination, the Department agreed that the Taxpayer is an industrial processor when conducting tobacco reclamation activities at the Virginia facility. The reclamation process involves performing a treatment to recover tobacco from outdated or damaged cigarettes for remanufacture into new cigarettes. The aging of tobacco is an integral part of the Taxpayer's cigarette manufacturing operation but, unlike the reclamation process described, the Taxpayer does not perform any type of "treatment" on the Tersa Bales. I cannot agree that the storage and aging of the Tersa Bales at the Taxpayer's facility constitutes industrial processing.
CONCLUSION
Based on my review of the facts in this case, I find no basis to overturn my prior determination. The aging of the Tersa Bales is not industrial processing, and the warehouse and storage portion of the Taxpayer's facility is not a plant site for purposes of the industrial processing exemption. The Tersa Bale Heads do not qualify for exemption because they are not used directly in industrial processing. For these reasons, the use tax was properly assessed on the Taxpayer's purchase of the Tersa Bale Heads.
The Taxpayer will receive an updated bill that will include accrued interest. No additional interest will accrue provided the Taxpayer makes payment within 30 days of the date on the bill.
The regulation section cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions or wish to discuss the information in this letter, please contact ***** in the Office of Policy and Administration, Appeals and Rulings at *****.
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- Sincerely,
Janie E. Bowen
Tax Commissioner
- Sincerely,
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AR/55387S
Rulings of the Tax Commissioner