Tax Type
Retail Sales and Use Tax
Description
Manufacturing, High Pressure Die Washer and Grinding Machine
Topic
Taxability of Persons and Transactions
Date Issued
08-10-1992
August 10, 1992
Dear*****
This will reply to your letter of December 2, 1991 in which you seek correction of a sales and use tax assessment for the period of January, 1988 through March, 1991.
FACTS
* * * (the Taxpayer) is a manufacturer engaged in the production of high quality, technologically advanced business products. Due to the nature of the product being produced, the manufacturing process must be integrated, sophisticated and extremely sensitive to quality requirements. The Taxpayer was recently audited and is taking exception to the following equipment held taxable in the audit.
*High Pressure Die Washer and Related Equipment
The high pressure die washer is used to remove residue resulting from the combination of additives and polymer plastic utilized in the production process. It is necessary to remove, wash, clean and polish the production die in order to maintain required production standards. Failure to perform the die cleaning function will result in unacceptable defect rates and subsequent production stops. The Taxpayer is also taking exception to equipment used to lift, remove and hold the die during the cleaning process.
*Grinding Machine and Related Equipment
In order to maintain the production of high quality parts, the production dies must be at the proper level of sharpness in order to cut the metal instead of tearing it. In order to achieve this, the dies must be removed and sharpened in accordance with production levels. The grinding machine held taxable in the audit is routinely used to grind the dies to the proper level of sharpness. Related equipment is used to remove and transport the dies to the grinding machine.
Va. Code § 58.1-608(3)(b) provides an exemption for industrial manufacturing and processing and exempts, "[m]achinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale . . .'. (Emphasis added).
"Used directly,' when used in relation to manufacturing, is defined under Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration.' (Emphasis added).
Virginia Regulation (VR) 630-10-63 interprets both of the above statutes as follows:
The term "used directly' refers to 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 . . . .
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 immediate part of such production process.
As can be seen from the above, in order for an item to enjoy the industrial manufacturing exemption, such item must be used directly in manufacturing a product for sale, or must be actively and continuously consumed in maintaining exempt production machinery. While the high pressure die washer and grinding machine perform functions that maintain the production equipment and are necessary to carry on production, they are not used directly in the actual "production of a product,' nor are they actively and continuously used in maintaining production machinery.
Based on the above, I find no basis for revising the audit liability.
Sincerely
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner