Tax Type
Retail Sales and Use Tax
Description
Doff tickets used in textile manufacturing
Topic
Exemptions
Date Issued
10-24-1985
October 24, 1985
Re: Section 58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of May 8, 1985 requesting relief from an assessment of sales and use tax for the period February 1, 1982 through December 31, 1984.
FACTS
***** (Taxpayer) is in the business of textile manufacturing. In connection with such business, Taxpayer uses certain "doff tickets" or color coded tags which identify yarn by type, lot, color and texture during one phase of the production process. Once they are used such tickets are discarded and replaced by a new ticket in a later phase of production. Therefore, such doff tickets do not stay with the product throughout the production process, and are not attached to the finished product (e.g.. carpet), when it is shipped from Taxpayer's plant. Taxpayer contends that such doff tickets are quality control supplies used-directly in production (to prevent the mixing of different dye lots), and should therefore be exempt from the tax.
DETERMINATION
§58.1-6O8(1) of the Virginia Code exempts from the sales and use tax "machinery or tools...fuel, power, energy, or supplies, used directly in processing." (Emphasis added) The term "used directly" is defined by §63O-10-63 of the Virginia Sales and Use Tax Regulations to include "those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration." The integral manufacturing process, starts "with the handling and storage of raw materials at the plant site and [continues] through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the same plant site, and also includes production line testing and quality control." Furthermore, the regulation section continues, only tangible personal property which is "indispensable to the actual production of products for sale and which are an immediate part of such production process," qualifies for the exemption.
The department has consistently maintained that in order to qualify for the exemption, as equipment used for production line testing or quality control, the equipment must act upon the product itself, and not merely improve the efficiency of a production operation. Therefore, the doff tickets in the present case, while arguably essential to the smooth operation of Taxpayers business, do not perform a quality control function under the sales and use tax law.
However, such tickets would qualify as supplies used directly in Taxpayer's production process, since they are an indispensable and immediate part of such production process.
Therefore, based on all of the foregoing, I find basis for correction of the assessment in this case.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner