May 19. 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) as a result of an audit for the period Mara 2011 through June 2013. The contested assessment is paid in full. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a lumber manufacturer. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property used or consumed by the Taxpayer in its operations.
The Taxpayer contests the tax assessed on strapping materials and strapping tool parts and maintains that such items are exempt from the tax as an integral part of the production process. The Taxpayer maintains that strapping is used throughout its production process starting at the green chain with green cut lumber that is manually strapped and unstrapped at multiple points and conveyed to the stacker, the dry kiln, and finally the planer for finishing. At the planer, the finished lumber is machine wrapped with plastic strapping before it is moved from the production area to a shed awaiting shipment to customers. For these reasons, the Taxpayer contends that the strapping is not strictly used for shipping lumber to market. According to the Taxpayer, it uses 75% of its metal strapping in an internal production process to maintain the integrity of its products (i.e., to prevent damage to its products) and uses a smaller percentage of plastic strapping for bundling lumber prior to it going to the planer.
In a conversation with a member of the Department's Appeals and Rulings staff, the Taxpayer explained that it loads finished products onto its trailers and hires a trucker to ship these products to customers.
DETERMINATION
Strapping Materials
Virginia Code § 58.1-609.3 (2) (iii) provides an exemption from the retail sales and use tax for “machinery or tools or repair parts therefor or replacements thereof . . . supplies, used directly in . . . manufacturing . . . converting products for sale or resale.” [Emphasis added.] Pursuant to Va. Code § 58.1-602, manufacturing and processing 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, and also includes equipment and supplies used for production line testing and quality control." [Emphasis added.]
Interpreting the above cited statute, subsection C 2 of Title 23 of the Virginia Administrative Code (VAC) 10-210-920 clarifies that the industrial manufacturing exemption applies to tangible personal property, used at the plant site, to convey raw materials to storage or from storage to the production line, to convey unfinished products from one step of production to another, or to convey finished products to the warehouse or storage area. Public Document (P.D.) 05-22 (3/4/05) clarifies that the exemption applies to tangible personal property used to convey finished products from the production line to the shipping area.
Subsection B 2 of Title 23 VAC 10-210-920 indicates that for an item to be used directly in manufacturing, it must be used in an activity that occurs during the actual production process. Thus, any quality control activities must occur during production. Furthermore, in order for an item to be used directly, it must be indispensable to the actual production of products for sale and must be an immediate part of the production process.
In this case, unfinished lumber is strapped in order to convey it from one step of production to another and to prevent damage to the lumber. After receiving the final cuts and planings, the lumber is a finished product but is not ready for sale until it has been strapped into the final bundle. The last stage of strapping occurs before the finished lumber is conveyed to storage or to shipping. Based on these specific facts, I find that the strapping plays an essential and immediate role in the quality control conveyance of the Taxpayer's unfinished lumber from one stage of production to another, as well as, the conveyance of finished lumber to storage. Accordingly, the strapping materials will be removed from the audit.
The circumstances in this case are distinguishable from the circumstances described in P.D. 10-85 (6/4/10), 10-145 (7/26/10), and 96-301 (10/24/96). In P.D. 96-301, the determination focused on the denial of the packaging exemption and treated strapping used to bind wooden products into a bundle as used only for taxable distribution purposes. The other two determinations relied upon the policy set out in P.D. 96-301 because convincing arguments were not presented for applying the production exemption. However, the Taxpayer in the instant case has made it plainly evident that it uses strapping in exempt production activities.
While I recognize in the instant case that the industrial manufacturing exemption applies, it is important to note that the strapping materials do not qualify for the packaging exemption, which is set out in Va. Code § 58.1-609.3 2 (iv), because the finished lumber product is not placed into a package or container as required by the Supreme Court of Virginia in order to be entitled to the packaging exemption. See Webster Brick Co. v. Department of Taxation, 219 Va. 81, 86, 245 S.E.2d 252, 255, 256 (1978).
Strapping Tool Parts
Based on the statutory and regulatory authorities cited above, I find that the contested strapping tool parts are used directly in an exempt production process. As such, the strapping tool parts will be removed from the audit.
CONCLUSION
The contested assessment will be revised in accordance with this determination. Because such assessment has been paid, a refund of the overpaid amount of tax and interest will be refunded as soon as practical. Interest on such overpayment amount will also be issued in accordance with Va. Code § 58.1-1833 (A).
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5752052392.R