Tax Type
Retail Sales and Use Tax
Description
Pest control items used by beverage bottler
Topic
Taxability of Persons and Transactions
Date Issued
03-20-1985
March 20, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of January 22, 1985 in which you submit an application for correction of sales and use tax assessed to as the result of a recent audit.
FACTS
***** ("Taxpayer") is engaged in the bottling of beverages for sale or resale. A recent audit produced an assessment for the taxpayer's failure to remit the sales and use tax on purchases of various items, including roach killer and electronic bug killers used to control pests in its bottling plant and on pallets which belonged to the taxpayer but were repaired by others.
The taxpayer contests the addition of tax to, roach killer and electronic bug killers, contending that such items are used directly in industrial manufacturing and are therefore exempt from tax. In addition, the taxpayer contests the imposition of tax on charges for repairing pallets, contending that such charges primarily represent labor.
Lastly the taxpayer contests the addition of penalty to the regular expenses portion of the instant audit.
DETERMINATION
Section 58.1-608.1 of the Code of Virginia provides an exemption from the sales and use tax for machinery and tools used directly in industrial manufacturing or processing activities is which products are produced for sale or resale.
In interpreting "direct use" exemption statutes, the Virginia Supreme Court in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E. 2d 619 (1973) applied a two-pronged test to determine whether an item was exempt from the tax:
(1) whether the item is indispensable to actual production of tangible personal property... and (2) whether the item is primarily used or consumed immediately in production of tangible personal property...
Under such a test, the roach killer and electronic bug killers in question here would not be entitled to exemption as they are not indispensable to actual production, i.e. production can carry on without them, and as they do not touch directly on production. The court noted in Community Motor Bus, supra, that such "convenient or facilitative items are, of course, not exempt" under the two-pronged test.
As to charges for the repair of pallets, the department's consistent policy is stated in Section 630-10-90 of the Virginia Retail Sales and Use Tax Regulations (copy attached):
Any person engaged in the business of" repairing tangible personal property is required to register and to collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed or retail price, the parts, materials and supplies sold, the tax will apply to the total charge including repair labor.
Inasmuch as the dealer repairing pallets for the taxpayer did not separate charges for labor and supplies in billing the taxpayer, the tax is applicable to the total charge. Since the dealer did not bill tax to the taxpayer, the tax on pallet repair charges was appropriately included in this audit.
Based upon the foregoing, I find no basis for relief of tax assessed to the taxpayer. However, is find basis for the relief of penalty assessed as the taxpayer exhibited good overall compliance in remitting tax on taxable purchases for its own use.
Sincerely,
W. H. Forst
Tax Commissioner
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of January 22, 1985 in which you submit an application for correction of sales and use tax assessed to as the result of a recent audit.
FACTS
***** ("Taxpayer") is engaged in the bottling of beverages for sale or resale. A recent audit produced an assessment for the taxpayer's failure to remit the sales and use tax on purchases of various items, including roach killer and electronic bug killers used to control pests in its bottling plant and on pallets which belonged to the taxpayer but were repaired by others.
The taxpayer contests the addition of tax to, roach killer and electronic bug killers, contending that such items are used directly in industrial manufacturing and are therefore exempt from tax. In addition, the taxpayer contests the imposition of tax on charges for repairing pallets, contending that such charges primarily represent labor.
Lastly the taxpayer contests the addition of penalty to the regular expenses portion of the instant audit.
DETERMINATION
Section 58.1-608.1 of the Code of Virginia provides an exemption from the sales and use tax for machinery and tools used directly in industrial manufacturing or processing activities is which products are produced for sale or resale.
In interpreting "direct use" exemption statutes, the Virginia Supreme Court in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E. 2d 619 (1973) applied a two-pronged test to determine whether an item was exempt from the tax:
(1) whether the item is indispensable to actual production of tangible personal property... and (2) whether the item is primarily used or consumed immediately in production of tangible personal property...
Under such a test, the roach killer and electronic bug killers in question here would not be entitled to exemption as they are not indispensable to actual production, i.e. production can carry on without them, and as they do not touch directly on production. The court noted in Community Motor Bus, supra, that such "convenient or facilitative items are, of course, not exempt" under the two-pronged test.
As to charges for the repair of pallets, the department's consistent policy is stated in Section 630-10-90 of the Virginia Retail Sales and Use Tax Regulations (copy attached):
Any person engaged in the business of" repairing tangible personal property is required to register and to collect and pay the tax. If the dealer performing the repair work does not separately state, itemize or segregate at a fixed or retail price, the parts, materials and supplies sold, the tax will apply to the total charge including repair labor.
Inasmuch as the dealer repairing pallets for the taxpayer did not separate charges for labor and supplies in billing the taxpayer, the tax is applicable to the total charge. Since the dealer did not bill tax to the taxpayer, the tax on pallet repair charges was appropriately included in this audit.
Based upon the foregoing, I find no basis for relief of tax assessed to the taxpayer. However, is find basis for the relief of penalty assessed as the taxpayer exhibited good overall compliance in remitting tax on taxable purchases for its own use.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner