Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Chemical Additives
Topic
Taxability of Persons and Transactions
Date Issued
04-23-1992
April 23, 1992
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to************* letter of April 8, 1991 and your letter of July 1, 1991 seeking correction of sales and use tax assessed to ********** (the Taxpayer).
FACTS
The Taxpayer is a manufacturer of bulk pharmaceutical chemicals. In order to conduct the production process of the chemicals, temperature control of the chemicals raw material reactions is critical. A cooling tower is in place at the plant site to provide cooled water to the production process. An audit of the Taxpayer for the period March, 1986 through February, 1989 produced an assessment for its failure to remit the sales and use tax on untaxed purchases of chemical additives used in the maintenance of the cooling tower.
The Taxpayer contests the assessment of tax on the purchases of chemical additives citing that the cooling tower is part of the production process and as such the chemical additives used to prevent the formation of bacteria, algae, foam, and rust are part of the production process as well and are not subject to the tax according to Va. Code §58.1-608(A)(3)(b) and Virginia Regulation (VR) 630-10-63 (Manufacturing and processing).
DETERMINATION
Va. Code §58.1-608(A)(3)(b)(iii) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in ... manufacturing ... products for sale or resale." The term "used directly is defined in 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 ... process, but not including ancillary activities such as general maintenance or administration." (Emphasis added).
Interpreting the above statutes, VR 630-10-63(B)(2) provides:
-
- Items of tangible personal property which are used directly in manufacturing ... are machinery, tools and repair parts therefor, fuel, 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. ... items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing processing even though such items may be directly attached to exempt production machinery. (Emphasis added).
- Items of tangible personal property which are used directly in manufacturing ... are machinery, tools and repair parts therefor, fuel, 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. ... items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing processing even though such items may be directly attached to exempt production machinery. (Emphasis added).
To further illustrate this point, PD 85-208, 10/31/85, copy enclosed, makes the distinction between water treatment chemicals which serve a general maintenance function and those that serve to protect the integrity of the product. It was concluded in that ruling that anti-corrosive chemicals mixed with the water used in the product were deemed to be an integral part of the manufacturing process. Without the use of those chemical additives the quality of the end product would have been compromised. In contrast, the chemical additives described in the instant case do not mix with the actual product chemicals, as their use is solely for the maintenance of the various engineering mechanisms of the cooling system to facilitate the free flow of water through the cooling tower system.
The department has traditionally held the general maintenance function with regard to its indirect use in the manufacturing process as taxable pursuant to the Virginia Supreme Court's opinions in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E. 2d 619 (1973), copy enclosed, and Webster Brick v. Department of Taxation, 219 Va. 81, 245 W.E. 2d 252 (1978).
Applying the facts in this case to the statutes, regulations and court cases cited above, I cannot agree that the chemical additives under protest are exempt from the sales and use tax as tangible personal property used directly in the manufacturing process. Consequently, I do not find basis for correction of the assessment. As the facts of this case are clear and as my determination is based on longstanding caselaw and policy, I see no need for a hearing on this issue.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5128J
Rulings of the Tax Commissioner