Tax Type
Retail Sales and Use Tax
Description
Packaging equipment used after storage
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
02-25-1985
- February 25, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of December 31, 1984 in which you submit an application for correction of sales and use tax assessed to as the result of a recent audit.
FACTS
A recent audit of ***** (Taxpayer) produced an assessment for its failure to remit the sales and use tax on its lease of certain computer equipment and packaging equipment.
The computer equipment in question was leased by the taxpayer for its own use, then subleased to out-of-state lessees when the equipment was deemed inadequate for the taxpayer's needs. The packaging equipment in question was located at a warehouse away from the taxpayer's plant site for use in packaging finished products for shipment to customers. The taxpayer contests the inclusion of such items in the department's audit.
DETERMINATION
As to the computer equipment in question, I find that the taxpayer's liability for the sales and use tax ended when it subleased the equipment to out-of-state customers. The taxpayer's lease from the equipment's owner in this case was exempt from the tax as of the initial sublease dates since the taxpayer was in effect holding the computers for resale. Furthermore, the taxpayer's subleasing of the equipment is not subject to the tax as the computers were delivered to customers outside of Virginia.
As to the packaging equipment in question, it is necessary to study the statutory tax exemptions provided to manufacturers like the taxpayer. Section 58.1-608.18 of the Code of Virginia exempts "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in...manufacturing...products for sale or resale." Virginia Code Section 58.1-602.9 defines "manufacturing" as including "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" (Emphasis added). In addition, Virginia Code Section 58.1-6O8.1(d) provides an exemption for "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale."
In analyzing whether the packaging equipment in question is exempt from the tax, the department must adhere to the doctrine of strict construction adopted by the Virginia Supreme Court with respect to tax exemptions (see Commonwealth v. Community Motor Bus, 214 V. 155, 198 S.E. 2d 619 (1973)). Under a strict reading of the statute, we are immediately able to determine that an exemption for the packaging equipment does not exist under Virginia Code Section 58.1-608.1(d) as the equipment is not a container, label, sack, or similar packaging material. Therefore, the equipment must fall under the Virginia Code Section 58.1-608.18 exemption for machinery and tools in order to escape taxation.
Virginia Code Section 58.1-608.18 exempts "machinery...used directly in...manufacturing". The statutory definition of "manufacturing" found in Virginia Code Section 58.1-602.9 provides that the exemption continues through to "the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site." The above definition indicates an intention that the manufacturing exemption end when tangible personal property is conveyed to storage. In this case, product packaging occurs after storage, thus an exemption is not available for the packaging equipment included in the department's audit. Even if an exemption was deemed to exist for equipment used to package products after storage at a warehouse, an exemption still would not be available to the taxpayer since the above definition specifically provides that exempt manufacturing activities, including storage, must occur on the production site. The warehouse in question is not at the taxpayer's production site; therefore, packaging equipment used at the warehouse is not used directly in manufacturing. Such a holding is consistent with the ruling of the Circuit Court of the City of Charlottesville in the case of Charlottesville Newspapers v. Commonwealth (1978).
Based upon the foregoing, charges for the lease of computers to the taxpayer will be removed from this audit, but tax assessed on packaging equipment used away from the taxpayer's production site will remain due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner