Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Garment manufacturing and distribution system
Topic
Taxability of Persons and Transactions
Date Issued
11-16-1993
November 16, 1993
Re: Request for Ruling: Sales and Use Tax
Dear***********
This will reply to your letter in which you request a ruling as to the sales and use tax application to the direct replenishment and sortation equipment being installed at the *****(the Taxpayer) ********Virginia.
FACTS
The Taxpayer is in the business of garment manufacturing. The Taxpayer operates a manufacturing/distribution center in**********Virginia. In order to remain competitive in the garment industry, the Taxpayer is installing an integrated manufacturing and distribution system (the System). One of the goals of the System is to provide a direct link-up with customer's cash registers so that the sale of a specific garment from the customer's place of business is transmitted to the Taxpayer and a replacement garment of the same size and color is shipped within 24 hours.
The System consists of a computer driven tilt-tray sorter, conveyor, and racking system. The System serves a multiple of purposes as follows: i) routing products for further processing, ii) conveying finished products to storage, iii) conveying finished products directly from production line onto outgoing trucks, and iv) conveying finished products from storage onto outgoing trucks. When manufacturing is completed, finished goods are conveyed immediately to a sortation system, to route cartons to replenish pick/pack lanes, to complete final operations to meet customer's specific needs, and then through the same sortation equipment for distribution to outgoing trucks. Approximately 80% of the products entering the System are processed further to meet customer's need while approximately 20% are finished goods upon entering the System. The Taxpayer is seeking a ruling as to the sales and use tax application to the System.
RULING
Va. Code §58.1-609.3.2 (copy enclosed) provides a sales and use tax exemption for machinery, tools, repair parts therefor or replacement thereof, fuel, power, energy and supplies used directly in processing and manufacturing products for sale and resale. This section goes on to say that such machinery, tools, and repair parts shall only be exempt provided the preponderance of their use is directly in manufacturing and processing. The preponderance of use test is set forth in Virginia Regulation (VR) 630-10-63(D) (copy enclosed) as follows:
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- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.
- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.
As provided in your letter, and as exhibited to members of my staff who visited the plant on August 11, 1993, the System operates in both a taxable activity (distribution) and an exempt activity (processing). Based on VR 630-10-63(D), the tax status of the functions served by the system are set forth below.
i) Routing products for further processing - exempt.
ii) Conveying finished products to storage - exempt.
iii) Conveying finished products from the production line onto outgoing trucks - exempt.
iv) Conveying finished products from storage onto outgoing trucks - taxable.
In order to determine the tax status of the System, percentages must be established between taxable versus nontaxable use.
However, based on the fact the System was not fully operational at the time members of my staff toured the facility, it is not possible to determine the taxable status of the System at this time. Once the System is fully operational and percentage can be established, the preponderance of use rule as set forth above will apply.
If you should have any further questions, please feel free to contact this office.
Sincerely,
W.H. Forst
Tax Commissioner
OTP/6819K
Rulings of the Tax Commissioner