Tax Type
Retail Sales and Use Tax
Description
Dry kiln used in furniture manufacturing
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
11-20-1989
November 20, 1989
Re: §58.1-1821 Application/Sales and Use Tax
Dear**************
This will reply to your letter of August 4, 1989, on behalf of ************** (hereinafter taxpayer), seeking correction of a sales and use tax assessment for the period February 1986 through December 1988.
FACTS
The taxpayer is in the business of furniture manufacturing. The taxpayer has a dry kiln located at its plant site which is used to cure green lumber prior to manufacturing. The kiln structure is bolted down to a concrete base, which contains a heating system to remove moisture from green lumber and an exhaust system to remove the moisture from the structure. In the recent sales and use tax audit, the auditor held the purchase of two dry kiln packages, sprinklers, insulation and kiln coating taxable. The dry kiln packages in question include all machinery which is contained in the kiln. The entire package was held taxable due to the fact that no breakdown was available between machinery and structural items. The taxpayer contends that the entire kiln constitutes production machinery and is therefore exempt.
FACTS
§630-10-63 of the Virginia Retail Sales and Use Tax Regulations exempts from the sales and use tax "machinery, tools or repair parts, fuel, power, energy, or supplies used directly in manufacturing or processing." §630-10-63(B)(2) of the Regulations addresses "direct use" as it pertains to manufacturing and states, in part, the following:
-
- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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... Emphasis added.
- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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... Emphasis added.
In Webster, exemption was denied for the structural materials used in the floor of a manufacturing plant. The floor in question constituted a trackage system, which the court found to be indispensable to the production of brick but used only indirectly in such production. In Wellmore, the court found taxable the material used to construct a coal tipple structure. In its opinion, the court specifically noted that "[the] structure contains, inter alia, a foundation, windows, floors, walls, work areas for employees, and a roof," 228 Va. at 154.
The instant facts may be analogized directly to Webster and Wellmore in that the walls, floors, ceiling and doors of the kiln help to expedite production, however, they do not play an immediate role in the production or quality control process. This position is further supported by the fact that the kiln is classified as real property, rather than as machinery and tools, for local property tax purposes.
However, machinery within the kiln structure which is used directly in the drying process of the lumber (such as the heating and exhaust systems) would enjoy the sales tax exemption. If you can provide to the department the actual cost price of the machinery and equipment, the department will remove this cost from the audit. Any additional information should be submitted to Technical Services Section, P.O. Box 6-L, Richmond, VA 23282.
If you should have any further question, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner