November 24, 2015
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Machinery and Tools Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of your client, ***** (the "Taxpayer"), with the Department of Taxation. You appeal assessments of Machinery and Tools (M&T) tax issued to the Taxpayer by the ***** (the "City") for the 2013 and 2014 tax years. You also appeal the City's denial of a refund of M&T tax paid for the 2012 tax year.
The M&T tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of M&T tax assessments. On appeal, a M&T tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves that it is incorrect.
The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer produced metal products at its facility in the City using a multistage process. The Taxpayer had a different, pre-existing die for each product. First, wax was injected into the dies to create wax patterns. The patterns were then dipped in ceramic slurry compounds and treated with sand to form ceramic molds. Next, the wax was removed from the mold cavities. To cast the final product, molten metal was poured into the molds and allowed to cool. The molds were removed, and the resulting metal products underwent further strengthening and finishing processes. At each stage, the Taxpayer also employed equipment for quality control.
On its M&T tax return for the 2012 tax year, the Taxpayer included the equipment involved with producing the wax patterns and the ceramic molds as property subject to tax but excluded the equipment on its 2013 and 2014 returns on the basis that it had not been used in a manufacturing process. The City adjusted the 2013 and 2014 returns to include the equipment and issued assessments. The Taxpayer paid the assessments and filed an appeal with the City, requesting refunds of the M&T tax attributable to such equipment for each of the 2012 through 2014 tax years.
In its final determination, the City upheld the assessments and denied the refund for the 2012 tax year, concluding that the equipment was used in a continuous, complex manufacturing process. The City also determined that the Taxpayer should be prevented from asserting that the equipment was not used in a manufacturing process because it had taken a contrary position in claiming the equipment was exempt from Virginia's retail sales and use tax. Further, the City found that the Taxpayer had represented that its wax patterns and ceramic molds were separate products from the finished metal items. The City did, however, determine that certain tools and equipment used to modify or repair the dies and other equipment at the facility should not have been included in the property subject to the M&T tax.
The Taxpayer filed an appeal with the Tax Commissioner, contending that the equipment used to make the wax patterns and ceramic molds was not used in a manufacturing process and, thus, was not subject to the M&T tax because the manufacturing did not begin until the molten metal was poured into the ceramic molds. The Taxpayer also contends that because the M&T tax is separate from Virginia's retail sales and use tax, sales tax principles should not be applied in determining the outcome of a M&T tax case. In addition, the Taxpayer asserts that its only saleable products were the finished metal items.
ANALYSIS
Taxation of Machinery and Tools
All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X § 4 of the Constitution of Virginia. Included in the category of tangible property that is declared intangible and subject to state taxation only is "[c]apital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures,office equipment and computer equipment used in corporate headquarters) . . . ." See Va. Code § 58.1-1101 A 2.
The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507 A also provides:
Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.
Used in Manufacturing
In City of Winchester v. American Woodmark, 250 Va. 451, 458, 464 S.E.2d 148, 152 (1995), the Virginia Supreme Court (the "Court") stated, "Since 1950, the Tax Commissioner has opined that the phrase 'machinery and tools' contained in Va. Code § 58.1-1101 A 2 and its precursors, means machinery used in the actual process of manufacturing." The Court also cited previous opinions of the Attorney General in deriving the meaning of "used in manufacturing."
In The Daily Press, Inc. v. County of Newport News, 265 Va. 304, 576 S.E.2d 430 (2003), the Court amplified the principles set forth in American Woodmark:
The principle gleaned from American Woodmark can be simply stated: personal property that may be essential to the overall operations of a manufacturing business is not 'machinery and tools' subject to local taxation unless the property is actually and directly used in the manufacturing process where new materials are transformed into a substantially different product or the property is connected with the operation of machinery actually and directly used in the manufacturing process. 265 Va. 304, 311.
The Attorney General has consistently opined that "machinery and tools" used in a particular manufacturing business are the machinery and tools that are necessary in the particular manufacturing business and which are used in connection with the operation of machinery that is actually and directly used in the manufacturing process. Id., citing 1985-1986 Att'y. Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590. Id.
This language does not imply that each piece of machinery or each tool used directly in the manufacturing process must be directly connected to the complete transformation of a material into something substantially different in character. In Public Document (P.D.) 04-39 (8/2/2004), the Department found equipment and tools that did not directly transform or even touch the product being produced could be used directly in the manufacturing process. The question, therefore, is not whether a particular piece of machinery transforms a product, but whether such machinery or tool is used directly in a manufacturing process.
Estoppel
In its final determination, the City stated that the Taxpayer should not be able to assert that the equipment used to make the wax patterns and ceramic molds was exempt from the M&T tax when it had asserted that such equipment was used to manufacture products for sale or resale in order to obtain a retail sales and use tax exemption. Virginia Code § 58.1-602 defines "manufacturing, processing, refining, or conversion" for purposes of the sales and use tax exemption under Va. Code § 58.1609.3 2(iii). Local property taxes, however, have their own characteristics, separate and distinct from the retail sales and use tax. The purpose of the M&T tax statutes is to establish what property may be subject to tax while the laws governing the retail sales and use tax determine which purchases are exempt from the tax. As such, it is possible that a taxpayer's manufacturing equipment may not be treated the same under Virginia's sales and use tax rules and the M&T tax statutes. See P.D. 13-63 (5/10/2013).
Manufacturing Process
The Taxpayer contends that the process of making the wax patterns and ceramic molds was not a manufacturing process because the patterns and molds were not its products and were not incorporated into its products, i.e., the finished metal goods. The City's position, however, is that such equipment was taxable as part of a continuous, complex manufacturing process that began when the wax patterns were made from the dies.
In The Daily Press, the taxpayer had machines and equipment to gather and store news and advertisements and to determine the content of the newspaper and its physical layout. Such equipment included computers, servers, modems and other equipment linked in a local area network (LAN) as well as photography equipment. Negatives of each page were created electronically or by photographing the page, and the images were cast onto aluminum press plates. In the pressroom, the printing press transformed a large news print roll into a newspaper using the press plates, ink, and a water fountain solution mix. Citing County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 69, 380 S.E.2d 890, 893 (1989), the Court defined the term "manufacturing" as "the transformation of 'new material into an article or a product of substantially different character." Applying this definition, the Court found that the only place where manufacturing had occurred was in the pressroom where the raw paper rolls were transformed into the newspaper.
The Taxpayer contends that the process of making wax patterns and ceramic molds was like the pre-press process the Court held was not manufacturing in The Daily Press. The facts of this case, however, are distinguishable from the facts of The Daily Press. The pre-press process of gathering information for publication, storing it in electronic or paper form, organizing it and casting negative images on press plates was not manufacturing because it did not involve the transformation of new materials into articles or products of substantially different character. See The Daily Press, 265 Va. at 310, 576 S.E.2d at 433.
In this case, however, different materials were being transformed into products of substantially different character at each stage of the Taxpayer's production process. Raw wax was injected into the dies to make solid wax patterns. The Taxpayer then created ceramic molds using a dipping process to coat the patterns in different raw materials, ceramic slurry compounds and sand. Dewaxing processes removed the wax patterns, destroying them in the process. Molten metal was poured into the resulting mold cavities and allowed to cool to form the metal products. The molds were then removed, in a process that also resulted in their destruction. All of the wax patterns and ceramic molds used in the production process had to pass their own quality control tests.
The Taxpayer is essentially arguing that manufacturing can only occur when it results in a final product for sale. The Court's definition of manufacturing from The Daily Press does not require products to be sold in order for the process of making them to be considered manufacturing. The definition leaves open the possibility of multi-stage manufacturing processes and the possibility that one manufactured article may be consumed in the process of making another.
DETERMINATION
After carefully considering all of the arguments and evidence presented, I find that the processes of making the wax patterns and ceramic molds were manufacturing processes and that the machinery and tools used directly in their production were subject to the M&T tax. Accordingly, the City's assessments for the 2013 and 2014 tax years and the denial of the taxpayer's refund request for the 2012 tax year are upheld.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6037069276.M