Tax Type
Retail Sales and Use Tax
Description
Sand and gravel processor; Storage bin leg supports; Cement storage bin
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
12-10-1987
December 10, 1987
Re: §58.1-1821 Application/ Sales and Use Tax
Dear *****************
This will reply to your letter of June 29, 1987 on behalf of *********** (taxpayer) seeking correction of an audit assessment issued in the above referenced case for the period May 1983 through April 1986.
FACTS
The taxpayer purchases bulk sand and gravel and packs it for distribution and sale to certain retail stores. The taxpayer also manufactures and sells concrete patio blocks. In connection with a recent audit, the taxpayer was held liable for the tax on its purchases of certain items used in both its packing and concrete block manufacturing operations. The taxpayer contests the assessment, contending that such purchases qualify for exemption from the tax as "machinery or tools or repair parts therefor or replacements thereof, used directly in processing, [or] manufacturing...of products for sale or resale." under Virginia Code §58.1-608(1).
The bulk of the items contested were purchased by the taxpayer for use in its sand and gravel packing operation, and include such items as storage bins which store unprocessed sand and gravel at the taxpayer's plant site; parts for a corn roaster used to remove moisture from sand and gravel prior to packing or use in the taxpayer's block manufacturing process: a John Deere loader and loader parts used for transporting sand and gravel from the storage bins to the first stage of the taxpayer's packing or manufacturing operations; parts for two heat sealer machines used to seal bags of sand and gravel; parts for a compressor which produces air pressure necessary to operate
the heat sealer machines; parts for a bagger; and parts purchased for the repair of forklifts used to transport sealed bags of sand and gravel to storage areas pending sale and shipment.
In addition, the taxpayer contests the application of the tax to various items purchased for use in its patio block manufacturing process such as a cement storage bin and storage bin leg supports, and radiant heaters used during winter months to cure patio blocks.
DETERMINATION
Sand and Gravel Packing Operation
Section 58.1-608(1)(c) of the Virginia Code 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." However, as noted by the Virginia Supreme Court in Golden Skillet v. Commonwealth 214 Va. 276, 199 S.E. 2d 511 (1973), the statute "is intended to provide exemption for machinery and tools used in processing (or) manufacturing...products for sale or resale only in the industrial sense."
§58.1-602(9) of the Code provides that those businesses listed in codes 10-14 and 20-39 of the Standard Industrial Classification Manual will be deemed to be among those that are industrial in nature. In addition, the Virginia Supreme Court in Commonwealth v. Orange-Madison, 220 Va. 655, 261 S.E. 2d 532 (1980), stated that in order for processing to occur a product need only "undergo a treatment rendering the product more marketable or useful," provided of course that the processing is industrial in nature.
Based on these criteria, and since the taxpayer's packing operation substantially increases the marketability of sand and gravel, I find basis for concluding that the taxpayer qualifies as an industrial processor when it packages sand and gravel for sale or resale.
Accordingly, the assessment will be revised to remove machinery, equipment and repair or replacement parts for such machinery and equipment, used directly in the taxpayer's sand and gravel packing operation.
Patio Block Manufacturing Process
It is my understanding that the permanently mounted radiant heaters being contested were previously removed from the assessment by the department's auditor.
The cement storage bin is used to store dry cement powder immediately prior to the first active stage of the taxpayer's block manufacturing process. Located at the base of the bin is a motor driven auger which dispenses the cement powder into a concrete mixer.
As quoted above, §58.1-608(1) of the Virginia Code provides an exemption from the sales and use tax for machinery, tools, and other tangible personal property used directly in the manufacturing or processing of products for sale or resale. Virginia Retail Sales and Use Tax Regulation 630-10-63(B)(2), then provides that the term used directly refers to, "those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process." This same subsection then defines the integrated manufacturing process to include "the production line of a plant, factory, mill, etc., starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the same plant site." (Emphasis added)
Since the cement storage bin is used by the taxpayer in the handling and storage of raw materials used in its manufacturing process, I find the bin to be used directly in exempt manufacturing. Therefore, the audit will be adjusted to remove the taxpayer's purchase of the cement storage bin.
However, since the storage bin leg supports are one step removed from the taxpayer's actual production process, they are not "used directly" in manufacturing, and therefore do not qualify for exemption. However, the enclosed regulation provides an exception to this general rule for "[s]teel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty." (See, VR 630-10-63(B)(2) Accordingly, I will consider adjusting the assessment to remove the leg supports, upon receipt of additional information from the taxpayer, within thirty days of the date of this letter, regarding how the supports are affixed to the storage bin, and the underlying realty. Such information should be remitted to the department's Technical Services Section, Office Services Division, at P.O. Box 6-L, Richmond, Virginia 23282.
At the end of thirty days, the audit will be revised in accordance with the foregoing, and a revised assessment will be issued to the taxpayer as soon as practicable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner