Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Aluminum manufacturer
Topic
Taxability of Persons and Transactions
Date Issued
01-29-1993
January 29, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********:
This will reply to your letter of August 14, 1992 in which you seek correction of a sales and use tax assessment of * * * (the "Company') for the period April 1987 through March 1990.
FACTS
The Company is a manufacturer of aluminum and other metal products. An audit of the Company produced an assessment for its failure to remit the sales and use tax on purchases of various items used in its production process.
The Company contests the inclusion of the items in the audit claiming that it uses the items in the various activities that are exempt from taxation and thus such items should not be subject to taxation. The Company further contests the penalty assessed in the audit.
DETERMINATION
The Company claims that five specific types of tangible personal property were incorrectly included in the audit. For simplicity reasons I will address each type of item individually.
Oils and Solvents
The Company uses oils and solvents to clean and generally maintain the manufacturing equipment. The Company claims that it uses the oils and solvents directly in its manufacturing process and the items should not, therefore, be subject to taxation. Virginia Regulation (VR) 630-10-63(A) specifically lists those types of items of tangible personal property that are directly used or consumed in a manufacturing or processing activity. Items that are used in the general maintenance of machinery and equipment are not specifically listed as exempt items.
In fact, VR 630-10-63(C)(2) includes "tangible personal property used in the repair, serving and maintenance of production machinery' under a listing of taxable items. Since the oils and solvents were used in the general maintenance of the equipment, they were properly included in the audit.
Dock Boards and Levelers
The Company uses dock boards and levelers to equalize the level of loading docks and trucks that are used to transport raw materials to the manufacturing site and to transport finished goods to a warehouse. The Company cites VR 630-10-63(B)(2) as holding that tangible property that is used in the manufacturing process is exempt.
For property to qualify for the manufacturing exemption the property must not only be used during the production process, it must also be used directly in the production process. VR 630-10-63(B)(2).
The dock levelers and boards are used to facilitate the loading and unloading of the trucks. Although the items facilitate the movement of raw materials and finished products, the items are not used directly in the production process. The dock boards and levelers were, therefore, correctly included in the audit.
Coveralls, Filters, and Disposable Boots
It is my understanding that the Company supplies coveralls, filters, and disposable boots to its employees to protect them from fumes and airborne paint droplets while such employees paint machinery and equipment manufactured by the Company for its use in its other manufacturing operations. VR 630-10-63(C)(2) lists "safety apparel furnished gratuitously by a manufacturer to its production line employees' as exempt from taxation. VR 630-10-63(B)(2) states that the manufacturing exemption includes the costs associated with the manufacturing of exempt production equipment. Since the equipment is supplied to employees for use while they engage in the production of machinery, the use of which would qualify for the manufacturing exemption, the items are exempt from taxation.
However, as determined in P.D. 88-95 (May 10, 1988, copy enclosed), had the employees used the equipment while they painted machinery that is already used as part of the production line, the safety items would be subject to taxation. VR 630-1O-63(B)(2) provides that tangible personal property used in general maintenance activities are subject to taxation. This would include protective apparel and safety items used in the pursuit of administrative activities. See P.D. 88-95.
Training Video
The Company contracted with an outside production company to produce an instructional video for use by the Company in training its employees. The Company argues that the true object of the transaction with the production company was to obtain its professional services, similar to contracting with a programmer to develop a customized computer program.
The department has consistently held that the cost of an in-house training video is taxable to the party that contracts with a production company to produce the video or other training material. See P.D. 87-105 (March 30, 1987, copy enclosed) in which an advertising agency was required to collect sales tax on the total cost of producing a training video from the party that contracted for the production of the video.
The Company was, therefore, required to pay sales tax on its purchase of the training video. Contrary to the Company's assertion, the true object of the transaction was to obtain the video and not the production Company's professional services, in fact, the Company's argument was unsuccessfully litigated in WTAR Radio-TV Corp. v. Commonwealth, 228 Va 877 (1977). The auditor's inclusion of the video in the audit was correct.
Waste Treatment Equipment
The Company Purchased waste treatment equipment which has been put into storage. The Company has not implemented the equipment into the production process, nor is it quite sure what it will do with the equipment. The Company asserts that the equipment should not be subject to taxation since it has not yet "used' the equipment and once it does use the equipment it will be used in an exempt activity. Alternatively, the Company argues that it may decide to resell the equipment, thus it should be entitled to the resale exemption.
Va. Code § 58.1-604 imposes the use tax on the use or consumption of tangible personal property in the Commonwealth. Va. Code §58.1-602 defines "use' as the exercise of any right or power over property which is incidental to the ownership of such property. Virginia Regulation (VR) 630-10-109(A) provides that "[t]he use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased.'
For purposes of the Virginia Code, the term "use' is not solely limited to placing an item into service within Virginia. Use also encompasses any act of ownership, including the taking possession of an item within Virginia and placing such item into storage. At the moment the Company took possession of the property in Virginia it exercised an incidence of ownership over such property.
Pursuant to VR 630-10-63, equipment must be directly used in the manufacturing process for such equipment to qualify for the manufacturing exemption. As of the date of the audit, the Company has not implemented the equipment into its manufacturing process. Until it does so, the Company cannot qualify for the manufacturing exemption since the equipment is not directly used in its manufacturing process.
Alternatively, Va. Code §58.1-608(A)(3)(i) exempts certified pollution control equipment from taxation if it is certified pursuant to Va. Code §58.1-3660. Va. Code §58.1-3660 requires that for equipment to be certified pollution control equipment it must be primarily used in abating or preventing pollution. As stated above, the Company has not implemented the equipment into a pollution control activity and has not received certification for such equipment. Since the equipment is not primarily used in such activity, it does not qualify for the exemption.
Further, the Company argues that it may decide to resell the equipment, thus the purchase would not be a taxable sale pursuant to Va. Code § 58.1-603. If the equipment is in fact later resold, the Company may apply to the department for equitable relief.
Without further clarification, the Company's exercise of ownership rights over the equipment results in the Company's purchase being subject to the Virginia use tax. Va. Code §58.1-604. Therefore, since the Company exercised ownership rights over the property while it was physically located in Virginia, rather then using the equipment in an exempt activity, inclusion of the equipment in the audit was correct.
Finally, it appears that with the adjustments as provided herein, the Company's level of compliance is adequate to avoid the imposition of a penalty. The penalty portion of the assessment will, therefore, be abated. The Company's account will be adjusted accordingly.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner