82-26 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Used directly in manufacturing, recycling of the printing cylinders

Topic

Appropriateness of Audit Methodology

Exemptions

Property Subject to Tax

Date Issued

03-24-1982

March 24, 1982

Re: §58-1118 Application/Use Tax

Dear****************

This will reply to your letter of October 9, 1981 applying for correction of use tax assessed against your client, *********** as the result of a recent audit.

Facts

********* (hereinafter referred to as **********) is an industrial rotogravure printer with a plant located in ********** Virginia.

The printing process begins with a "raw" printing cylinder. Copper is plated onto this cylinder which is then chemically etched with the image to be printed. A proof is run and any necessary corrections made to the cylinder. The corrected cylinder is then plated with chrome to protect it during-the press run and then run on the press to create the printed product. Once used the cylinder is recycled for future use. During this recycling process, the cylinder is dechromed, de-etched, and replated with copper in preparation for subsequent use.

At two stages during the printing/recycling process, the cylinder must remain stationary and undisturbed for a period of time. These delays occur after a press run when the cylinder must cool for up to 24 hours and after copper replating when the cylinder must "cure" for a period of 24 hours to allow the copper to soften sufficiently for etching.

During these two stationary phases, the cylinders are placed in a storage facility. Subsequent to a press run but prior to the customer's release the cylinders are stored on racks in the press roam. Once the release is acquired, or if no release is required, cylinders are placed in a paternoster during both the cooling and curing phases. The paternoster is a three-tiered mechanized storage rack connected to a computer which allows rapid storage, identification, and selection of a given cylinder. Cylinders may remain in the paternoster from 24 hours to two weeks, depending upon the need for a particular cylinder.

*********** is contesting the assessment of use tax on the paternoster.

Determination

§58-441.6 of the Code of Virginia exempts from the sales and use tax:

- machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale [emphasis added].

§ 58-441.3(q) defines "used directly" as:

- those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process...

In interpreting these two sections, the Department has consistently held that machinery, tools, and supplies used to produce a machine, tool or supply to be used in manufacturing a product for sale are exempt under the integrated manufacturing concept of § 58-441.3(q). (See Sales and Use Tax Circular No. 8, June 1, 1973.) Inasmuch as the recycling of the printing cylinders constitutes the manufacture or reprocessing of a supply which is used directly in your industrial printing operation, this process would be part of the integrated manufacturing exemption. To the extent that tangible personal property is used in the manufacture of a supply, it is not subject to the sales and use tax.

Based on the foregoing, we have determined that the paternoster as it is used in your client's operation is not subject to the sales and use tax and the audit will be adjusted accordingly.

Sincerely,

W. H. Forst
State Tax Commissioner

Rulings of the Tax Commissioner