Tax Type
Retail Sales and Use Tax
Description
Machines used directly in the manufacturing process qualify for industrial manufacturing exemption
Topic
Manufacturing Exemption
Date Issued
08-05-2011
August 5, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This reply is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period May 2006 through December 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer manufactures absorbent materials for fluid control. The Taxpayer's products are use in food packaging, hygiene products, decorating and filtration. The Taxpayer protests the use tax assessed on machines it believes are an integral part of the manufacturing process.
Tensile Testing System
The tensile testing system is used in conjunction with another machine that produces the absorbent pouches used in food packaging and hospital bed protection. The seals on the pouches must meet pre-determined standards to ensure they do not burst during customer use. The machine uses rolls of film to produce the pouches. Each time a new roll of raw film is readied for use, it is tested for sealant strength using the tensile testing system. Based on test results, the machine operator will make the necessary adjustments to the machine's sealant bars to bring the seal strength to acceptable levels. The tensile testing system is also used to test the final product.
The Taxpayer states that the tensile testing system sits next to the machine on the production line. However, the auditor observed the tester in a separate area behind the machine. The tester was held taxable because the auditor concluded that the machine was not part of manufacturing based on its location away from the main production area and its performance of tests on raw materials and finished products.
Metal Detector
The metal detector is used to test metal levels in completed sanitary pad and diaper products. Because Food and Drug Administration regulations forbid metal contaminants in these products, the manufacturer discards the product if metals are discovered. The metal detector sits in the production area and testing takes place on completed and bagged products that have not been packaged and sealed into boxes for sale. The metal detector was held taxable as the auditor concluded that the testing of the final completed product was outside the manufacturing production process.
DETERMINATION
Virginia Code § 58.1-602 states that manufacturing includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continues to the last step of production where the product is completed for sale and conveyed to a warehouse at the production site. The statute states that the manufacturing process also includes equipment and supplies used for production line testing and quality control.
Title 23 of the Virginia Administrative Code (VAC) 10-210-920 exempts from the sales and use tax all machinery used directly in manufacturing or processing. The regulation goes on to define "used directly" as those activities that are an integral part of the production of the product, including all steps of an integrated manufacturing process limited to a single plant site.
Public Document (P.D.) 99-291 (11/12/99) discusses the assessment of tax on testing equipment. To ensure product quality, the taxpayer used the equipment to test component parts prior to their use in production. The ruling cites Title 23 VAC 10-210920 and explains that production begins with the handling and storage of raw materials at the plant site. In the ruling, the Tax Commissioner determined that component parts qualify as raw material, and the testing of the parts qualifies as the handling of raw material. Accordingly, the Tax Commissioner determined the equipment used to test the component parts prior to their inclusion in the production process was exempt of the tax.
The tensile tester was held taxable as the auditor determined film testing took place before actual production. The auditor believes that the film testing at issue in this case is pre-production and not a part of the manufacturing process. The strength test takes place after the film has been stored at the plant site for use in production. As discussed in Va. Code § 58.1-602, production includes the "storage and handling" of raw material. In P.D. 99-291, the Tax Commissioner determined that testing of raw materials qualifies as "handling" and is part of the production process.
The metal detector is used to determine if the final product is acceptable for packaging and shipment. This testing determines if the product is suitable for sale based on pre-set standards. Although the products are bagged, they are not packaged for final sale. The definition of "manufacturing" in Va. Code § 58.1-602 states that production ends when the product is completed for sale and conveyed to a warehouse at the production site. Accordingly, because the tested products have not yet been packaged for final sale and shipped to the warehouse, this testing also takes place within the scope of the production process.
Based on the foregoing, I find that both machines at issue are used directly in the manufacturing process for production line testing and quality control. Therefore, they qualify for the industrial manufacturing exemption pursuant to Va. Code § 58.1-609.3 2.
This matter will be referred to the audit staff to make the appropriate adjustments. A revised audit report and bill will be provided to the Taxpayer. The Taxpayer should pay the revised bill within 30 days of the date of the bill to avoid the accrual of any additional interest charges.
The Code of Virginia section, regulation and public document cited 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 about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
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- Tax Commissioner
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AR/1-4290766400.M
Rulings of the Tax Commissioner