Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Electrical Transformer and Main Switch Gear
Topic
Taxability of Persons and Transactions
Date Issued
08-12-1991
August 12, 1991
Re: §58.1-1821 Application: Sales and Use Tax
Dear******************
This will reply to your letter of March 20, 1991 in which you request relief of sales and use tax assessed to your client,********** (the Taxpayer), as a result of a recent sales and use tax audit.
FACTS
The Taxpayer is a manufacturer of plastic food containers. As a result of a recent sales and use tax audit, the Taxpayer was held liable for the sales and use tax on the purchase of a high to low electrical transformer and a main switch gear. The transformer reduces the voltage of electricity coming into the plant to a lower voltage compatible to the actual manufacturing machinery. In lieu of having separate transformers for each piece of production machinery, the Taxpayer chose to have one large transformer for the entire plant. The Taxpayer feels the transformer in question is directly used in the manufacturing process and is therefore exempt from the sales and use tax.
The main switch gear distributes energy to the entire production facility and the Taxpayer claims that 90% of the energy is distributed directly to the production machinery. The main switch gear is attached to production machinery by electrical wiring. The Taxpayer feels the main switch is used directly in the manufacturing process and is therefore exempt.
DETERMINATION
Va. Code §58.1-608(3)(b) extends the sales and use tax exemption to, "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." (Emphasis added).
Based on the above, it is clear that fuel, power, energy and supplies used directly in manufacturing are exempt. This brings us to the question of whether or not the transformer and main switch gear are "used directly" in the manufacturing process. The term "used directly" is defined in VR 630-10-63(B)(2) as "those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration." Based on the information provided, it is apparent that both the transformer and the main switch gear are necessary to provide electricity for the actual production process, therefore, would be exempt to the extent they provide power directly to exempt machinery.
However, the transformer and main switch gear are used in both a taxable (general plant distribution) and an exempt (production machinery distribution) manner. VR 630-10-63(D) provides the department's position on machinery used in both a taxable and exempt manner and states the following:
-
- When 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 preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.
It is stated in your letter that 90% of the power handled by the transformer and main switch gear is distributed to production machinery. Therefore, upon verification of this figure by a representative from the department, a refund of tax and interest on the items in question will be issued.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner