Tax Type
Retail Sales and Use Tax
Description
Taxpayer's use tax assessment on the same transaction results in double taxation; Exemptions
Topic
Manufacturing Exemption
Records/Returns/Payments
Taxpayers' Remedies
Date Issued
04-23-2012
April 23, 2012
Re: § 58.1-1821 Reconsideration: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of ***** (the "Taxpayer") in which you request reconsideration of the Department's prior determination issued for the period July 2005 through March 2008. I apologize for the delay in this response.
FACTS
The Taxpayer, a manufacturer of food products, was audited by the Department and assessed use tax on expense and fixed asset purchases made during the audit period. The Taxpayer filed an appeal of the audit assessment under Va. Code § 58.11821. A determination letter for the appeal was issued January 21, 2011. The Taxpayer requests reconsideration of the Department's position on four of the issues that were addressed in the determination.
DETERMINATION
Floor Scrubbers
The Taxpayer's purchase of two floor scrubbers was held taxable in the Department's prior determination. The Taxpayer states that the floor scrubbers are constantly and consistently used to vacuum and clean the floors in the production and raw material storage areas of the manufacturing facility. Many of the Taxpayer's food products are manufactured by mixing various ingredients together. The Taxpayer asserts that the use of the floor scrubbers protects the integrity of the manufactured products by keeping the products free of outside non-food materials and food ingredients that could contaminate subsequent production runs of different products.
The floor scrubbers are used between production runs when certain "at risk" food ingredients are used in the previous production run and could potentially contaminate the next product produced. For these reasons, the Taxpayer maintains that the floor scrubbers are an integral part of its manufacturing process and qualify for exemption.
In the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.Ed.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in the manufacturing exemption statute was intended to narrow the scope of the exemption. The 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 manufacturing regulation, Title 23 of the Virginia Administrative Code (VAC) 10-210-920. Subsection B 2 of the regulation states, "Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefore, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate art of such production process." (Emphasis added.)
Accordingly, the fact that an item is essential to production is not sufficient grounds for exemption unless the item is an immediate part of the actual production of the product. The floor scrubbers are not an immediate part of the Taxpayer's production process. In Public Document (P.D.) 10-244 (10/21/10), a manufacturer used purging compounds to clean and remove different color resins from production machinery prior to each production run in which a product with a new color was manufactured. The Tax Commissioner ruled that this cleaning process was not an exempt part of production because the activity occurred between production runs. The use of the purging compounds was not an immediate part of production because production was not taking place. This is also the case with the Taxpayer's use of the floor scrubbers. Based on the above, I must conclude that the manufacturing exemption does not apply to the Taxpayer's purchase and use of the floor scrubbers.
Storage Racks
During the audit period, the Taxpayer purchased storage racks that were installed in a building that was renovated for use as a manufacturing facility. The auditor observed that storage racks in the Taxpayer's existing manufacturing facility were used to store both raw materials and finished manufactured goods. The auditor determined the percentage of the racks used for storage of finished goods in the existing manufacturing facility and applied this percentage to the cost of the storage racks installed in the new facility. The calculated cost of the storage racks used for finished goods storage in the new facility was included in the audit. The Taxpayer maintains that the definitions of "production" and "distribution" in Title 23 VAC 10-210-920 C support a conclusion that the storage of finished goods at the plant site is part of the exempt manufacturing process.
Virginia Code § 58.1-602 defines "manufacturing" to include "the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site . . . ." Title 23 VAC 10-210-920 C 2 describes "production" to include "the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site." (Emphasis added.) The statutory definition of manufacturing makes it clear that the manufacturing process ends when production of the product has been completed and the product has been conveyed to storage.
Title 23 VAC 10-210-920 C 3 addresses the distribution function of manufacturing businesses and states, in part, that distribution is "the transport or conveyance of products after the completion of production and is not part of manufacturing and 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. All tangible personal property used to convey, transport, handle, store, market or display finished products is taxable." To support its position, the Taxpayer appears to rely on the phrase, "other than storage at the plant site," in the definition of distribution in Title 23 VAC 10-210-920 C 3. This phrase merely clarifies that the storage of goods at a plant site for further manufacture or processing at the same plant site is not a taxable activity because production has not been completed.
It is important to note that the statutory definition of manufacturing includes the storage of raw materials. Yet, the storage of finished goods is excluded from the definition. This demonstrates that there was no legislative intent to include the storage of finished goods as part of the manufacturing exemption. If this had been the case, the statute's language would have included the handling and storage of finished goods in the definition of manufacturing. In Shelor Motor Co. v. Miller, 261 Va. 473, 479, 544 S.E.2d 345, 348 (2001), the Court stated, "It is well settled that when the language of a statute is plain and unambiguous, we are bound by the plain meaning of that language." Based on the plain language of the exemption statute, there is no basis to conclude that the storage of finished goods is an exempt manufacturing activity.
P. D. 96-218 (9/5/96) discusses a case in which a manufacturer used a tank at the plant site to store liquid nitrogen for future delivery to customers and for further processing at another plant site. The tank was deemed to be taxable because the liquid nitrogen was a finished product when stored in the tank. P.D. 07-81 (5/18/07) addresses the general application of the sales and use tax to racking systems. This ruling explains that the use of racking systems may qualify for the industrial manufacturing exemption when used by a manufacturer to store raw materials at the plant site. However, the ruling is silent with respect to granting the manufacturing exemption to racking systems used to store finished goods at a plant site. In conclusion, there is no basis to remove the storage racks from the Taxpayer's audit.
Forklifts
The Taxpayer continues to contest the inclusion in the audit of lease payments for two forklifts. During the audit, the auditor observed the forklifts in question being used to perform construction renovations for a facility owned by the Taxpayer. The prior determination concluded that the forklifts were primarily used in taxable activities based on the preponderance of use test set out in Va. Code § 58.1-609.3 2. The Taxpayer states that the renovated facility is now an operational manufacturing plant and the forklifts have been used directly in manufacturing activities at the facility since January 2008. The Taxpayer maintains that the lease payments for the forklifts qualify for the manufacturing exemption because the preponderance of the forklifts' use has been in exempt manufacturing activities since that time.
During the audit period, the forklifts were not used in manufacturing activities but were used almost exclusively to perform construction renovations, which is a taxable activity. The prior determination explained that the actual use and not the intended use of the property is the determining factor for whether the manufacturing exemption applies. The forklifts were deemed taxable because the preponderance of use test was applied to the forklifts' actual use during the audit period. This position was supported in the original determination by P.D. 98-125 (8/5/98). P.D. 04-200 (11/3/04) discusses this same issue with respect to a manufacturer's purchase of a dust collection system.
In this case, the forklifts were leased on a monthly basis. Based on the Department's policy, each monthly lease payment is treated as a separate transaction and the property's use during each monthly lease period must be examined to determine if an exemption applies to the lease charge for the period. P.D. 07-38 (4/20/07) illustrates this policy and discusses a case in which a taxpayer leased equipment from an out-of-state vendor and later transferred the equipment to Virginia for use in the state. The Tax Commissioner ruled that if the sales and use tax was paid on a monthly basis at the time the lease payments became due, the Virginia use tax applied to the lease charges for those months that the equipment was used in Virginia.
While the Taxpayer contends that the preponderance of use test should be applied to the current use of the forklifts, the equipment was used in taxable activities for periods in the audit that the lease payments were made. Thus, I must conclude that the forklifts were properly treated as taxable in the audit. However, the lease payments are exempt from the sales and use tax for the periods when the preponderance of the forklifts' use was in exempt manufacturing or production activities. Based on the information provided by the Taxpayer, the forklifts were used predominantly in manufacturing activities beginning in January 2008. Applying the preponderance of use test, the forklifts qualify for the manufacturing exemption beginning January 2008. The lease charges for January through March 2008 will be removed from the audit. The remaining lease payments were properly held taxable in the audit.
Desk and Table
The Taxpayer purchased a desk and table from a cabinet maker and the transaction was held taxable in the original appeal. The Taxpayer has provided evidence that the cabinet maker was audited by the Department and the sale of the desk and table was taxed in that audit.
Virginia Code § 58.1-604 3 states that "[a] transaction taxed under § 58.1-603 shall not also be taxed under this section, nor shall the same transaction be taxed more than once under either section." This statute was enacted to avoid the double taxation of transactions under both the sales tax and use tax statutes. A member of my staff has confirmed that the retail sales tax was assessed on the desk and table. The Taxpayer's use tax assessment on the same transaction results in double taxation. Thus, a credit for the tax, penalty and interest assessed on this transaction will be allowed against the Taxpayer's audit liability.
CONCLUSION
The audit will be adjusted to reflect the removal of the forklift lease payments for January through March 2008 and to allow a credit for the tax, penalty and interest assessed on the desk and table. A reduction of ***** in taxable measure for the forklift leases reduces the assessment by ***** tax, ***** penalty and ***** interest. The assessment will be reduced by ***** tax, ***** penalty and ***** interest due to the credit for the desk and table. The interest amounts are computed through the original audit computation date of October 9, 2008.
An updated bill with accrued interest will be issued to the Taxpayer. The accrued interest on the bill will reflect the adjustments noted. The Taxpayer should pay the bill within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulations and public documents cited 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 concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
Craig M. Burns
Tax Commissioner
1-4794014721.S
Rulings of the Tax Commissioner