91-288 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Industrial Materials; Laundries and Dry Cleaners

Topic

Taxability of Persons and Transactions

Date Issued

11-18-1991

November 18, 1991

Re: §58.1-1821 Application: Sales and Use Tax

Dear*********************

This will reply to your letter of April 5, 1990 in which you submitted additional information to support the tax exempt status of laundry containers and laundering supplies. These items were determined to be taxable in my letter of March 19, 1990 (P.D. 90-44). You contend that approximately 75% of the cans, containers and baskets in use by **********(the Taxpayer) are used directly in production activities, while those used in distribution activities makes up the remaining 25%.

Virginia Regulation (VR) 630-10-63(C)(3) deals with the distribution function of an industrial manufacturer or processor and states, in part, the following:

- "Distribution" is the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the storage of a product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale. All tangible personal property used to convey, transport, handle, store, market or display finished products is taxable. Such property includes... tangible personal property used to transport manufactured products to market or customers. (Emphasis added.)

As previously established, the laundry carts, containers and cans held fully taxable in the audit, may be put to use in both a taxable manner (distribution), and also an exempt manner (production). As stated in my letter of March 19, 1990, items used in both taxable and exempt production activities are subject to the preponderance of use rule in determining the status of the laundry carts. The estimates you provided relate to the percentage of carts that merely enter the cleaning plant each day. However, for purposes of the preponderance of use test, we must determine the percentage of time that the carts are used in exempt (production line) and nonexempt (distribution) activities. For purposes of computing nonexempt usage, you must include (1) the time that a cart typically spends in transit from the cleaning plant site to the customer's site with fresh linen, (2) the time the cart spends at the customer's site, and (3) the time spent in transit back to the cleaning plant site with soiled linen. I will allow the Taxpayer an additional 30 days to provide this office with percentages of exempt and nonexempt usage in accordance with the above. Upon verification by the auditor of the percentages presented, the preponderance of use rule will be applied.

In regard to your contention that the laundry carts and containers would qualify for the exemption set forth in VR 630-10-63(A)(4), I disagree. It is the department's position that this section refers only to containers "used for packaging tangible personal property for shipment or sale." VR 630-10-26, copy enclosed, clearly states under subsection B, that the tax applies to equipment "used in connection with the shipment or sale of tangible personal property."

As stated in my letter of March 19, 1990, the Taxpayer operates in a dual capacity of leasing laundered products and laundering customer owned linens. I concur with your conclusion in regard to Commonwealth v. Orange-Madison Coop., 220 Va. 655, 261 S.E.2d 532 (1980), in the fact that industrial processing exists whether or not the finished product is sold at the wholesale level or the retail level. However, in the case at hand, this is not the issue. The department has allowed an exemption for all washroom supplies and detergents used in the retail linen supply business. In regard to the laundering of customer owned linens, the Taxpayer is neither selling at the retail level nor at the wholesale level. The Taxpayer is simply providing a laundering service to its customers, thus making all tangible personal property used in providing such services subject to the tax. Therefore, the detergents and washroom supplies were properly prorated between their taxable and exempt use in the recent audit.

Based on the foregoing, absent additional information concerning the use of the carts discussed above, the audit assessment will be deemed fully due and payable.

Sincerely,

W. H. Forst
Tax Commissioner

TPD/3871K

Rulings of the Tax Commissioner