Tax Type
Retail Sales and Use Tax
Description
Computer use to gather production line data in textile manufacturing business
Topic
Taxability of Persons and Transactions
Date Issued
06-23-1988
June 23, 1988
Re: §58.1-1821 Application/Sales and Use Tax
Dear**************
This will reply to your letter of March 8, 1988, seeking the correction of an assessment issued in the above referenced case for the period January 1985, through December, 1986.
FACTS
In connection with its textile manufacturing business, ********** ("The Taxpayer"), purchased a host computer for use in its manufacturing process. The host computer in question monitors speeds, widths, and temperatures on five Tenter Frames (textile weaving machines). Using data from the speed measurements, cloth overfeed is computed by the host computer and sent back to terminals at each Tenter Frame. Overfeed is the measure of cloth being fed to the machine relative to the speed at which the cloth traverses the machine. Overfeed measurement is used by the machine to adjust the Tenter frames to compensate for losses due to slippage as the machine surfaces wear.
The Taxpayer protests the assessment of tax on maintenance agreements for the host computer.
DETERMINATION
§58.1-608(1) of the Virginia Code provides an exemption from the sales and use tax for "machinery...used directly in...manufacturing...products for resale." The term "used directly" is defined in Va. Code §58.1-602(22), 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." The term "manufacturing" is defined in Va. Code §58.1-602(9), as including "equipment and supplies used for production line testing and quality control."
§630-10-63(C)(2) of the Retail Sales and Use Tax Regulations provides that "[c]omputer hardware and software used to direct or control production line and/or quality control operations" are exempt. Conversely, "computer hardware and software used merely to monitor production operation, e.g.,...make production information available to plant personnel...are deemed taxable...."
Subsection D of Virginia Regulation 630-10-63 provides that "[w]hen a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in nonexempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production."
The host computer gathers data from the Tenter Frames and sends this information back to the CRT attached to the Tenter Frames. A CRT operator analyzes data from the host computer and makes program adjustments using the CRT which in turn adjusts the Tenter Frames. These adjustments are necessary in controlling overfeed in the production of textile. The host computer is used more than 50 percent of the time for this type of activity.
The computer system at issue is used to process ongoing production line data and provides equipment operators with the information to enable them to make the constant equipment adjustments necessary to ensure correct and continuous production of the product. Because this system is such an integral part of production line control, it is my opinion that such computer system is used directly in industrial manufacturing. Consequently, we agree that the computer is used directly in industrial manufacturing.
Therefore, I agree that the host computer is exempt from the tax. Inasmuch as the maintenance and service contracts follow the status of the tangible personal property to which they relate, I find these charges also to be exempt. The audit will be adjusted accordingly and we will issue a revised Notice of Assessment.
If you have any further questions, please do not hesitate to contact the Department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner