91-291 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Industrial Materials; Computer System Used in Shoe Manufacturing

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 22, 1991, on behalf of ************** (the Taxpayer), seeking correction of a sales and use tax assessment for the period of January 1988 through October 1990.

FACTS

The Taxpayer is in the business of manufacturing shoes. The Taxpayer's Pattern Shop and Die Shop are located in their administrative office building, separate from their main manufacturing facility. The work of the Pattern Shop involves the use of a computer aided design system ("CAD system") to grade and cut patterns for shoes. The CAD system is a computerized system which takes a pattern of a shoe for one size and designs all other patterns sizes for the same style of shoe. The CAD system is also used to operate a laser cutter which cuts patterns from which metal dies are made. The die patterns are then sent to the Taxpayer's Die Shop or to an outside die maker.

The Taxpayer is taking exception to the taxing of the CAD system in a recent sales and use tax audit. The Taxpayer contends that the CAD system is exempt from the sales and use tax because its function is an integral part of the manufacturing process, regardless of the fact that it is used at a location separate from the main manufacturing facility.

DETERMINATION

Va. Code §58.1-608(3)(b) addresses the manufacturing/processing exemption, and subsection (iii) exempts from the sales and use tax the following:

- 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.)

The term "used directly" when used in relation to manufacturing and processing, is defined under Va. Code §58.1-602 as follows:

- ... 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 and administration, (Emphasis added.)

The term "manufacturing" is defined in Va. Code §58.1-602 as:

- the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site.

In the case at hand, the CAD system is used to design and cut die patterns for various shoes and shoe sizes. The die patterns are in turn used to produce the metal dies which are used in the actual production process. Inasmuch as the industrial exemption is limited by statute to the production line of a plant, steps that are preparatory to production, are not within the scope of the exemption (See P.D. 88-17 (1/4/88) enclosed.) While I am aware that the actual die produced by the Die Room, and the tools used in producing the die, would be exempt as a part of the integrated manufacturing process, the CAD system, regardless of its location, is not within the scope of the exemption set forth above and is therefore taxable.

If you should have any further questions, please feel free to contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

TPD/5163K

Rulings of the Tax Commissioner