Rulings of the Tax Commissioner

September 24, 2014

Re:      Ruling Request:  Retail Sales and Use Tax

Dear *****:

                 This is in response to your request for a ruling on the application of the Retail Sales and Use Tax with respect to capital expenditures for a plant expansion and renovation by ***** (the "Taxpayer").

FACTS

                The Taxpayer proposes to expand and upgrade its existing manufacturing plant. The Taxpayer plans to upgrade its utilities with purchases of transformers and electrical distribution equipment used to power equipment in the Taxpayer's production process in an effort to increase production capacity.  The Taxpayer states that 87% of the energy will be distributed directly to production machinery.  The Taxpayer also plans to purchase a compressed air system used to provide the necessary air pressure for air powered production tools.  The Taxpayer also plans improvements to provide bulk gases to welding stations used in the production process.

                The Taxpayer plans to purchase a computer controlled machining center to directly machine large steel fabrications.  The machining center requires the installation of an isolated, stand-alone foundation in order to achieve the necessary tolerances for the production process.  The Taxpayer also plans to purchase electrical distribution equipment in order to power the machine.

                 The Taxpayer requests a ruling on whether certain purchases and equipment qualify for the manufacturing exemption.

RULING

 Application of the Manufacturing Exemption

          In pertinent part, Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for:

(iii) 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;

 ***

Machinery, tools and equipment, or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is directly in processing, manufacturing, refining, mining or converting products for sale or resale.

All exemptions from the retail sales and use tax are required to be strictly construed against the one claiming the exemption.  Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).  With this strict construction rule in mind, Title 23 of the Virginia Administrative Code § 10-210-920(B)(2) defines the term "used directly" as meaning "those activities that are an integral part of the production of a product, including all steps of an integrated process, but not including incidental activities such as general maintenance, management, and administration."  In conformity with the strict construction rule, this regulation further states:

 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. 

Transformers and Electrical Distribution Equipment

            Based on the facts presented, the electrical distribution equipment used with the computer controlled machining center qualifies for the manufacturing exemption.  However, while the electrical distribution equipment used with the computer controlled machining center will only be used in an exempt manner, the transformers and electrical distribution equipment purchased for the general expansion of the plant will be used in both a taxable and exempt manner.  Title 23 Virginia Administrative Code § 10-210-920(D) provides the Department's position on machinery used in both a taxable and exempt manner and states the following:

When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities.  Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.

 Based on the foregoing and the facts presented, I find that the manufacturing exemption is also applicable to the transformers and electrical distribution equipment purchased for the general expansion of the plant as 87% of the power handled by the transformer and other electrical distribution equipment is distributed to production machinery. 

Compressed Air System and Bulk Gases

              Based on the information provided, the compressed air system will be used to power equipment used directly in the manufacturing process and is exempt.  Improvements to provide bulk gases directly to welding stations are exempt because the gases are used directly in the manufacturing process.

 Computer Controlled Machining Center

                The computer controlled machining center is used to control machinery used directly in the industrial manufacturing process and is exempt.

 Machining Center Foundation

                The installation of a isolated, stand-alone foundation is required in order for the machining center to reach the tolerances necessary for the manufacturing process by preventing jarring by equipment and ground vibrations.  The foundation is not the floor of the building, but is instead a platform designed to float inside the building and maintain the integrity of the machining center.

                The Tax Commissioner has previously held in Public Document 95-129 that mobile vibration columns and louvered panels designed to prevent particles from being jarred loose by equipment and ground vibrations were used directly in quality control and qualified for the manufacturing exemption.  Similar to the facts presented in this case, the mobile vibration columns were platforms designed to float inside the building.  Based on the foregoing and the facts presented, the machining center foundation is used directly in quality control and qualifies for the manufacturing exemption.