Tax Type
Retail Sales and Use Tax
Description
Spray paint booths components may qualify for the manufacturing exemption
Topic
Manufacturing Exemption
Records/Returns/Payments
Date Issued
07-26-2011
July 26, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the period April 2007 through March 2010. I apologize for the delay in this response.
FACTS
The Taxpayer manufactures wood cabinets, tables and similar products. The Taxpayer was audited by the Department and assessed use tax on the purchase of two paint spray booths. The Taxpayer maintains that the paint spray booths qualify for the manufacturing exemption.
The Taxpayer contends that the paint spray booths are used directly in its production process and are an indispensable and immediate part of its manufacturing process. The paint spray booths are enclosed spaces that create a special environment for the controlled application of finishes. The paint spray booths allow adjustments to be made to drying times, temperature and humidity and limit the amount of dust particles and other airborne contaminants that can potentially degrade the finishes that are applied to products. The Taxpayer states that the use of the paint spray booths insures the integrity and uncompromised quality of the Taxpayer's finished products.
DETERMINATION
Virginia Code § 58.1-609.3 2 (iii) provides an exemption from sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale ...." The term "used directly" is defined in Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing ... process, but not-including ancillary activities such as general maintenance or administration."
In the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. The manufacturing exemption, therefore, applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products. This standard established by the Court is also reflected in the Department's manufacturing regulation. Title 23 of the Virginia Administrative Code 10210-920 B 2 interprets the "used directly" requirement of the manufacturing exemption statute and states:
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- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, 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. 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 or processing even though such items may be directly attached to exempt production machinery. Furthermore, the fact that the use of a particular item, such as firefighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing. [Emphasis added.]
The Taxpayer maintains that several public documents issued by the Department support an exemption for the paint spray booths. Public Document (P.D.) 88-284 (10/26/88) discusses the rental by a meat processor of insulated panels used to cure meat products. The panels were used during the curing of the meat products to control the temperature and humidity in a refrigeration building. The Tax Commissioner ruled that the panels qualified for exemption because they ensured the quality and integrity of the meat products.
In P.D. 93-135 (6/4/93), the Tax Commissioner agreed that lead doors used in a manufacturer's radar testing facility may qualify for the manufacturing exemption. The taxpayer was required to provide evidence that the lead doors helped create a sanitized testing environment for quality control purposes.
P.D. 95-129 (5/19/95) addresses clean room framework that was part of an environmental control system in a semiconductor manufacturing plant. The framework was made of special materials that do not generate, attract, retain or release particles or contaminants. Due to the nature of the framework materials and the role of the framework in the environmental control system, the Tax Commissioner determined that the framework was necessary to maintain quality control during production and qualified for exemption.
While I recognize the documents cited by the Taxpayer, the Department has issued several public documents that specifically address paint booths. The most recent, P.D. 10-105 (6/18/10), addresses a paint booth used by a manufacturer to bake its painted products. The Tax Commissioner ruled that the walls, floor and ceiling were taxable components of the paint booth. Although the paint booth created a controlled environment that was essential to production, the walls, floor and ceiling did not play an immediate role in production or in the quality control process. P.D. 10-105 does note that the exhaust system used to remove the overspray in the paint booth qualifies for exemption because of its immediate use in the production process.
P.D. 04-2 (1/13/04) discusses a business that designed and built a nonstructural paint booth to protect the integrity of its manufactured products while painting them. The fully enclosed paint booth was used to trap and remove paint overspray. While the paint booth was part of the taxpayer's production process, the components used to construct the walls, ceiling and ceiling fan framework of the paint booth were deemed to be taxable.
Furthermore, P.D. 01-195 (12/4/01) explains a similar policy that the Department applies to dry kilns. In this determination, the Tax Commissioner held that the structural components of dry kilns, such as walls, floors, ceilings and doors, do not play an immediate role in the manufacturing process or the quality control process. Thus, the dry kiln components were taxable despite the fact that they expedite the production process and are indispensable to the drying of green lumber.
As explained, certain components of the Taxpayer's paint spray booths may qualify for the manufacturing exemption. However, the paint spray booths are not fully exempt. While the paint booths at issue employ new technology that enhances the quality of the products produced by the Taxpayer, the structural components do not play a direct role in and are not an immediate part of the production process. In this case, the walls, ceiling and floor of the paint booths are not constructed of special materials or built in a manner that rises to the specialized nature and use of the insulated panels, lead doors or the clean room framework discussed in the public documents cited by the Taxpayer.
CONCLUSION
The Department's policy on paint booths is longstanding, and there is no basis to fully exempt the spray paint booths. Because certain components of the paint spray booths may qualify for the manufacturing exemption, the Taxpayer will be allowed 45 days to provide the Department documentation showing a breakdown of the costs of the components that make up each paint booth. The audit and assessment will be adjusted to remove the component parts of the paint booths that qualify for exemption based on the results of the review. Please contact ***** for instructions on submitting this documentation to the Department for review. If no documentation is received within 45 days, the assessment will be considered correct and the Taxpayer will be mailed an updated bill with interest accrued to date. Payment should be made within 30 days from the date of the bill to avoid the accrual of additional interest.
The Code of Virginia section, regulation 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 the Taxpayer has documentation to submit or has any questions concerning this response, contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4654642804.S
Rulings of the Tax Commissioner