07-13 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Poultry processing and distribution facilities

Topic

Manufacturing Exemption

Date Issued

03-26-2007

March 26, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in reply to your letter in which you request a ruling on behalf of your client, (the "Taxpayer"), regarding the application of the retail sales and use tax to pallets and shrink-wrap and printing plates. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates several poultry processing and distribution facilities within the Commonwealth and qualifies for the manufacturing and processing exemption under Va. Code § 58.1-609.3 2. The poultry products are processed and placed in tray packs that are boxed. The boxes are palletized and shrink-wrapped at the Taxpayer's processing facilities. The boxed tray packs are shipped to one of the Taxpayer's distribution facilities where the tray packs are unpacked, placed in storage and bar-coded. When a distribution facility receives an order from a customer, the tray packs are removed from storage and conveyed to weigh, price, and labeling machines where the tray packs are individually labeled based on the customer's requirements. The tray packs are then placed in cases that are weighed and labeled. Each case is then conveyed to a case-sealer and sealed before being palletized and shrink-wrapped for shipment to the customer.

The Taxpayer seeks confirmation that the pallets and shrink-wrap used to transport the poultry tray packs from its processing facilities to its distribution facilities qualify for the manufacturing exemption. The Taxpayer references Public Document (P.D.) 05-22 (4/5/05) to support its position. In addition, the Taxpayer questions if its pricing, labeling, casing and palletizing operation at the distribution facilities constitutes processing. If it does, do the pallets and shrink-wrap used in this operation qualify for the manufacturing exemption? Lastly, the Taxpayer questions if the manufacturing exemption applies to its purchase of printing plates used in the production of cartons that are used to package certain products.

RULING

Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for tangible personal property used directly in manufacturing products for sale or resale. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 provides that the 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 . . . ." This same definition provides that:

- The integrated manufacturing process noted above includes the production line of a plant, factory, mill, etc., starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the same plant site . . . .

Pallets and Shrink-Wrap

Processing Facilities

Virginia Code § 58.1-609.3 2 (iv) provides an exemption for "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale . . . ." This exemption is applicable to manufacturers that use packaging equipment and materials at the plant site prior to the completion of production.

The facts presented indicate that the processing of the poultry products is complete when the tray packs are boxed, palletized and shrink-wrapped at the processing facilities. The boxing, palletizing and shrink-wrapping of the poultry tray packs is an integral part of the Taxpayer's manufacturing process and is the last step in the Taxpayer's production process. After this step, the poultry products are ready for shipment to the distribution facilities.

P.D. 05-22, referenced by the Taxpayer, discusses a taxpayer that operated production facilities in Virginia and a distribution facility outside of the Commonwealth. The Tax Commissioner determined that pallets and shrink-wrap used in packaging activities at the plant site prior to storage or shipment of the products qualified for the manufacturing exemption. Accordingly, I agree that the pallets and shrink-wrap used at the Taxpayer's poultry processing facilities for the purpose of transporting the finished poultry products to the distribution facilities constitutes exempt processing and would be exempt from the tax as provided under Va. Code § 58.1-609.3 2 (iv). To further support this position, P.D. 98-146 (10/9/98) addresses a taxpayer that manufactured and distributed food products. The taxpayer shrink-wrapped its product on pallets for shipment to (1) a retailer for resale to the public, or (2) the taxpayer's warehouse and distribution facility for subsequent delivery to a retailer, or (3) a third party warehouse and distribution facility for repacking and shipment to a retailer. The Tax Commissioner determined that the pallets qualified for the manufacturing exemption because the shrink-wrap was applied to the pallets while at the manufacturing site and prior to the products' shipment.

Distribution Facilities

The Taxpayer's distribution facilities are located away from the processing facilities. The Taxpayer's products are transported to the distribution facilities where the tray packs containing the poultry products are removed from the boxes and temporarily stored at the distribution facilities pending receipt of customer orders. When a customer's order is received, the product is removed from storage and weighed, priced and labeled according to customer specifications. The product is then boxed, palletized and shrink-wrapped for shipment to the customer.

Distribution activities conducted by manufacturers are considered taxable in accordance with Title 23 VAC 10-210-920 C. "Distribution" is the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the storage of a product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale. I recognize that the activities conducted at the distribution facilities are essential to the Taxpayer's business operation. However, the weighing, pricing and labeling of the tray packs do not take place at the Taxpayer's processing facilities (the plant site) and, therefore, is not considered an integral part of the Taxpayer's manufacturing process. As such, the manufacturing exemptions under Va. Code § 58.1-609.3 2 do not apply to pallets and shrink-wrap used by the Taxpayer at its distribution facilities.

Title 23 VAC 10-210-400 addresses the application of the tax to packaging materials. This regulation distinguishes exempt packaging materials (such as sacks, cans, and boxes) from taxable transportation devices (such as pallets, strapping, and similar materials). The regulation provides that:

- Packaging materials may be purchased tax exempt by wholesalers and retailers as purchases for resale, if the items are marketed with the product being sold and become the property of the purchaser. Pallets used to brace or secure cargo for transport and restrain product movement in a single plane of direction are not packaging materials and may not be purchased tax exempt unless purchased for resale. (Emphasis added.)

If the Taxpayer markets the pallets and shrink-wrap with the poultry products sold to customers and the pallets and shrink-wrap become the property of the customers, the pallets and shrink-wrap would qualify for the resale exemption and may be purchased exempt of the tax.

Printing Plates

The Taxpayer purchases printing plates from an out-of-state vendor and instructs the vendor to ship the plates to a carton manufacturer in Virginia. The vendor charges the Taxpayer sales and use tax on the purchase of the plates. The carton supplier uses the plates to manufacture cartons that are used by the Taxpayer to package its "ready to eat" products at its processing facilities. The Taxpayer retains title to the plates used by the carton supplier and contends that the printing plates would be exempt from the sales tax if used by the Taxpayer in its manufacturing process. The Taxpayer maintains that the printing plates should qualify for the manufacturing exemption in this instance.

Title 23 VAC 10-210-3010 discusses the application of the manufacturing exemption to printers. Paragraph F of this regulation states "[m]aterials, such as photographs and plates, that are furnished by customers, but do not become a part of the printer's finished product, are taxable." P.D. 96-180 (7/10/96) is on point with the Taxpayer's situation. This public document explains that there is no manufacturing exemption available for the purchaser of printing plates when the purchaser does not use the printing plates to produce printed materials.

While the Taxpayer is a manufacturer, the Taxpayer does not use the printing plates directly in its manufacturing and processing operations. The manufacturing exemption does not extend to purchasers who do not actually use printing plates themselves. Therefore, the vendor has properly applied the tax to the sale of the printing plates to the Taxpayer.

The Code of Virginia sections, regulations, and public documents 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 website. If you have any questions regarding this matter, please contact ***** of the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/55853Q

Rulings of the Tax Commissioner