Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Water purification services
Topic
Taxability of Persons and Transactions
Date Issued
08-04-1993
August 4, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to a letter of February 17, 1993 written on your behalf in which you seek correction of a sales and use tax assessment for*********** (the "Taxpayer").
FACTS
The Taxpayer is engaged in providing water purification services for commercial customers. The Taxpayer connects water purification tanks to the water line servicing a customer's place of business; the tanks contain filtering compounds designed to remove contaminants from the water. To achieve the proper degree of water purity required by a customer, the Taxpayer determines the amount and types of compounds required for initial placement into the tanks and maintains the water purity level by periodically removing and replacing the tank and regenerating its contents (i.e., removing contaminants from the compounds) using various machinery and equipment located at the Taxpayer's place of business.
The Taxpayer was audited by the department and tax was assessed on the purchase of supplies and equipment. You maintain that the Taxpayer qualifies for the industrial manufacturing exemption under Va. Code §58.1-608(A)(3)(b)(i) and (iv).
DETERMINATION
Va. Code §58.1-608(A)(3)(b)(i) provides an exemption from the sales and use tax for:
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- 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 further provides that for a business to obtain the exemption, it must (1) produce products for sale or resale, and (2) such production must be industrial in nature.
Based on the information provided, the Taxpayer fails to satisfy the first requirement above. The facts presented indicate that the Taxpayer connects its water filtration system to its customers water line. The Taxpayer removes used tanks and replaces them with clean tanks; the dirty filtering compounds are removed from the used tanks and regenerated at the Taxpayer's place of business by placing them in a container to remove impurities. The regenerated compounds are placed in a clean tank for use by another customer. In no case is tangible personal property sold or leased, as required under VR 630-10-63. Instead, the Taxpayer retains complete control over the property's use and services the equipment as necessary.
You assert that there are many instances in which products produced by the Taxpayer are sold to customers. However, you have provided no documentation to substantiate that sales of the products produced by the Taxpayer occurred during the audit period. The only documentation of the sale of products produced by the Taxpayer relates to the last quarter of 1992, which is outside the period covered by the audit. While the Taxpayer's activities may now include the sale of tangible personal property which it produces, it is my understanding that during the audit period, the Taxpayer did not sell products which it produced.
You also assert that the Taxpayer qualifies for the exemption under Va. Code §58.1-608(A)(3)(b)(iv). This section exempts materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale. While the Taxpayer may be fabricating vessels, as you claim, it is doing so for its own use or consumption and not for sale or resale (as discussed above). Under VR 630-10-37, a fabricator who fabricates tangible personal property primarily for his own use or consumption and not primarily for sale or resale is not entitled to any of the production exemptions in Va. Code §58.1-608(A)(3)(b). Accordingly, the manufacturing exemption is not available to the Taxpayer for fabricating vessels, and its purchases are subject to tax.
Finally, you contend that the Taxpayer should be entitled to the manufacturing exemption because it is classified as a manufacturer for local license tax purposes. However, such a determination has no direct bearing on this matter. This is so because the laws permitting localities to impose license taxes refer to manufacturers in general, while the sales and use tax law refers to industrial manufacturers. Therefore, the sales and use tax law is more restrictive than the laws relating to license taxes.
Should the Taxpayer's business become primarily engaged in manufacturing industrial water purification equipment for sale or resale, the manufacturing exemption may be available for the purchase of some items. However, the regeneration of the tanks and cleaning of the resins for the water purification systems sold to customers would be a service to those customers and would not qualify for the exemption; purchases in connection with this service would be subject to the tax.
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6759F
Rulings of the Tax Commissioner