Tax Type
Retail Sales and Use Tax
Description
Processing and packaging
Topic
Exemptions
Date Issued
05-14-1993
May 14, 1993
Re: §58.1-1821 Application: Sales and Use Tax
Dear**********
This will reply to your letter of October 7, 1992 in which you seek correction of a recent sales and use tax assessment of***********(the Taxpayer) for the period of August, 1989 through June, 1992.
FACTS
The Taxpayer is in the business of processing and packaging of materials furnished to them by customers. The Taxpayer maintains contractual agreements with several manufacturing corporations to receive various raw materials for further processing or packaging in order to render such product more marketable or useful. Upon completion of the processing, the Taxpayer will either ship the product back to the manufacturer or to the manufacturer's customers. The Taxpayer maintains no inventory, nor does the Taxpayer make retail sales. The Taxpayer was audited and held liable for the sales and use tax on their processing equipment. The Taxpayer takes the position that he is operating as an industrial processor and should therefore enjoy the processing exemption.
Va. Code §58.1-608(A)(3)(b) provides a sales and use tax exemption for, "industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product." Virginia Regulation (VR) 630-10-63 provides that in order for an item to enjoy the manufacturing or processing exemption, such item must be "used directly" in an activity that is an integral part of the production of a product, including all steps of an integrated manufacturing process.
The Virginia Supreme Court found in Department of Taxation v Orange-Madison Coop. Farm Serv., 220 Va. 655, 261 S.E.2d 532 (1980), copy enclosed, that processing, unlike manufacturing, does not require transformation of a raw material into an article of substantially different character, but merely requires that the product becomes more marketable or useful.
Based on the above, I find the activities referenced in the Taxpayer's letter to be a part of an integrated industrial process; therefore, the equipment used directly in the processing activities shall be exempt. The audit will be adjusted accordingly.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6566K
Rulings of the Tax Commissioner