Tax Type
Retail Sales and Use Tax
Description
Safety, maintenance, and pollution control equipment
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
06-13-1988
June 13, 1988
Re: §58.1-1821 Application/Sales and Use Tax
Dear********************
This will reply to your letter dated December 3, 1987 in which you submit an application for correction of sales and use tax assessed to*************** ("taxpayer") as the result of a recent audit.
FACTS
The taxpayer was held liable for sales and use tax on various items of tangible personal property. The taxpayer contests the assessment on the safety ladder, RD ladder, boiler cleaner, buffer solution, pH tester, voltage regulator and parts, and reader and display/printer on the basis that the items in question were used directly in an exempt industrial manufacturing process. The taxpayer also contests the assessment on the air cleaners, ventilators, vertical tank and exhaust ventilation system on the basis that these systems were required by the State of Virginia and were added to current certified pollution control systems.
DETERMINATION
I will address each of the contested items on a separate basis below in the order Presented in your correspondence:
Safety Ladder
The taxpayer contends that this ladder is used on a welding fixture which is used to perform welds in the production process. The taxpayer maintains the safety ladder is a necessary part of the production process and is required by OSHA.
§58.1-608(1) of the Code of Virginia 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. The term "used directly" is defined in §58.1-602(22) of the Code of Virginia as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing... process, but not including ancillary activities such as general maintenance or administration."
In accordance with the foregoing, Virginia Regulation 630-10-63(B) provides that the exemption applies to "machinery, tools and repair parts therefor,...which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. The regulation further states:
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- Convenient or facilitative items, such as...platforms, structural steel, grating, equipment supports...or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery. Furthermore, the fact that the use of a particular item, such as firefighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing.
- Convenient or facilitative items, such as...platforms, structural steel, grating, equipment supports...or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery. Furthermore, the fact that the use of a particular item, such as firefighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing.
Based on the foregoing, while the safety ladder in question is an essential part of the welding process, it is not used directly in the taxpayer's production process. As such, I find no basis for a correction of the tax assessed on this item.
KD Ladder
Tho KD Ladder is used by the welder to gain height. The taxpayer contends that this ladder is required, as is the welding rod, to perform welds in the production process.
As indicated for the safety ladder above, while the KD ladder may be necessary to perform welds, it is not used directly in the production process and thus not an exempt item. I do not find basis for a correction of the tax assessed on this item.
Cleaner, Boiler
The taxpayer maintains the boiler's sole function is to provide heated water to clean and prepare parts in production for painting. Chemicals used in the boiler are required to keep the water purified during the cleaning process.
As noted earlier, in order for items to be exempt from the tax, they must be used directly in the manufacturing process. In the case of
Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978), the Virginia Supreme Court upheld the application of the sales and use tax to certain chemicals used in the maintenance of a boiler, stating that while such chemicals were essential to the operation of the business, they were not an immediate part of actual production.
It is my understanding that the taxpayer's boiler system is part of a three stage process. Certain chemicals are used to clean the products to prepare them for painting and other chemicals are used to maintain and clean the boiler itself. The chemicals purchased by the taxpayer from******* are used to clean the product; they are exempt under the used directly concept and have not been included in the assessment. However, the chemicals purchased from ********* have been included in the audit as they are used in the maintenance of the boiler itself.
Based on the foregoing, I do not find basis for relief of the tax assessed in this instance.
Buffer Solution and pH Tester
As with the boiler cleaner above, the buffer solution and pH tester are maintenance items and as such are not exempt.
Voltage Regulator and Parts
The taxpayer contends the voltage regulator and parts were in fact used to repair forklifts used directly in production activities and as such are exempt. The taxpayer has a separate facility for automobile repairs and mainly used the contested items on the forklifts.
As provided in VR 630-10-63(D) when an item is used in two different activities, one of which is exempt and the other which is taxable, the sales and use tax shall apply in full unless the preponderance of the item's use (fifty percent or more) is in exempt activities. If the taxpayer can provide the department with information showing the items in questions were used fifty percent or more in an exempt manner, I will agree to remove them from the audit. The taxpayer should remit this information to the department's Technical Services Section, office Services Division, P. O . Box 6-L, Richmond, Virginia 23282 within 60 days of the date of this letter.
Reader and Display/Printer
The taxpayer maintains this equipment is an integral part of the manufacturing process and is used to print bills of materials to construct products.
As noted previously with regard to the ladders, an item must be used directly in the manufacturing process in order to be exempt. While the bills of materials are necessary to let employees know how to construct the product, they are not primarily used or consumed immediately in the actual production of tangible personal property. Although this administrative function is essential to the production process, it is not an exempt activity. Therefore, the reader and display/printer are subject to the tax since the preponderance of their use is in a nonexempt activity. Enclosed for your perusal are copies of previous rulings by the department on the use of computers in a manufacturing process.
Air Cleaners
The taxpayer contends the air cleaners in question were required by the State of Virginia and added to current certified pollution control systems.
As set forth in §58.1-3660 of the Code of Virginia, the tax does not apply to pollution control equipment and facilities, used primarily for the purpose of abating or preventing pollution of the atmospheres or waters of the Commonwealth and which have been certified to the Department of Taxation by the State Water or State Air Pollution Control Board as used Primarily for abating or preventing pollution.
If the taxpayer can provide the department with certification from the proper state authorities that the air cleaners are used primarily for the abatement or prevention of pollution, these items will be removed from the audit. Please forward this information to the department's Technical Services Section.
Ventilators, Vertical Tank and Exhaust Ventilation System
The taxpayer maintains these items were added to current certified pollution control systems and are therefore exempt from the tax.
As previously noted with the air cleaners, if the taxpayer can provide the department with certification from the proper state authorities that these items are used primarily for the abatement or prevention of pollution, the audit will be adjusted accordingly.
In conclusion, after receipt of the information requested above, the audit findings will be adjusted in a manner consistent with this determination. If, however, the information is not received in the time period allotted, the balance of the audit assessment will become due and payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner