Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Chemical additives
Topic
Taxability of Persons and Transactions
Date Issued
12-21-1993
December 21, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your request for reconsideration of a previous determination on behalf of *********(successor of**************successor of ****************(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.
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. The assessment of the tax was upheld in P.D. 92-34 (4/23/92). The Taxpayer subsequently met with members of my staff and requests reconsideration of the previous determination.
DETERMINATION
Va. Code §58.1-609.3(2) provides an exemption from the sales and use tax for tangible personal property 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 ... but not including ancillary activities such as general maintenance or administration."
In order to manufacture its pharmaceutical product, the Taxpayer uses a cooling system. The major component of this system is a cooling tower which operates continuously to maintain a precise temperature of the chemical reactions occurring among the raw materials which are transformed into the final product. The cooling mixture used in the cooling tower consists of water and various chemical additives which allow the mixture to flow freely over plates preventing the accumulation of bacteria, algae, foam and rust within the engineering mechanisms of the cooling system. Failure to maintain the mixture will cause the cooling tower to shut down and thus inhibit the chemical production of the bulk pharmaceuticals. The chemical additives do not become commingled with the chemical product manufactured for sale.
Based on the Taxpayer's meeting with members of my staff and established policy, it is my conclusion that the chemical additives under protest serve to maintain the normal operation of the engineering mechanisms of the cooling tower. The tower serves a necessary function relative to the production process. However, the additives in this case compare to those discussed in P.D. 85-208 (10/31/85), wherein a distinction is made between water treatment chemicals used in general maintenance and those that relate directly to protecting the integrity of the product. It was concluded in that ruling that anti-corrosive chemicals mixed with the water used in the product itself were deemed to be an integral part of the manufacturing process; however water treatment chemicals used to maintain machinery were not.
In the present case, the chemical additives do not mix with, become a part of or even touch upon any component of the manufactured product. They serve to facilitate the free flow of the cooling mixture through the cooling tower system. The fact that federal law requires certain equipment or processes has no bearing on the exemption. Additionally, the frequency of the maintenance would have no impact on whether the exemption applies. Accordingly, I again find no basis for exemption of the chemical additives.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6488J
Rulings of the Tax Commissioner