Tax Type
Retail Sales and Use Tax
Description
Refuse collection, sorting, disposal, and recycling
Topic
Exemptions
Property Subject to Tax
Date Issued
05-20-1994
May 20, 1994
Re: Va. Code §58.1-1821 Application: Sales and Use Tax
Dear***********
This will reply to your letter of February 8, 1993 in which you seek correction of the sales and use tax audit assessment of your client, ******(the Taxpayer), for the period of May, 1986 through February, 1992.
FACTS
The Taxpayer is in the business of refuse collection, sorting, disposal, and recycling. The Taxpayer is under contract with a branch of the United States Government (the Government) to perform these functions. The contract includes three separate recycling functions as set forth below.
The Taxpayer picks up scrap metal from the Government, hauls the scrap to a location where their employees separate and sort the metal into various classes, and returns the metal to the Government scrap yard where they are sold by the Government to scrap dealers for manufacture into new products.
The second phase of the contract involves the removal of recyclable paper, i.e. cardboard and computer paper, from the Government's waste facility. Once the recyclable paper is sorted, the Taxpayer ships the paper to a separately owned paper mill where it is remanufactured into a useable product.
The third and final phase of the contract involves the handling of all waste wood generated at the Government facility. The Taxpayer uses a wood shredder which reduces the volume of waste wood to a ratio of approximately five to one. The shredded wood is then used as boiler fuel at the Government facility.
The Taxpayer feels that since the recycling process is not addressed in the Code of Virginia, and the fact that there are now tax incentives (i.e. income tax credits) for machinery and equipment used in the recycling business, such machinery and equipment should enjoy the sales and use tax exemption.
DETERMINATION
Va. Code §58.1-609.3(2) provides an exemption from the sales and use tax for machinery and equipment, tools, supplies, etc., used directly in the production of products for sale or resale by industrial processors. The term "processing" was defined by the Virginia Supreme Court in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980) as requiring that a product undergo a treatment rendering it more marketable or useful.
Virginia Regulation (VR) 630-10-63.B.1 defines industrial processor to include establishments engaged in the treatment of material, substances, or other products in such a manner as to render such products more useful or marketable. As a general rule, the department looks to the Standard Industrial Classification (SIC) Manual published by the U.S. Department of Commerce to determine those industries which qualify as "industrial processors or manufacturers." Industrial processors and manufacturers include those industries included in, but not limited to, SIC codes 10 through 14 and 20 through 39.
Keeping the above in mind, I will address those activities performed by the Taxpayer in fulfilling its contractual obligations with the Government. As provided above, in order for "industrial processing" to take place, the product being processed must undergo a treatment or change. The first two activities performed by the Taxpayer, i.e. the sorting of scrap metal and the removal of recyclable paper from the Government waste site, clearly do not fall under the category of "industrial processing." Neither the scrap metal nor the recyclable paper undergo a treatment by the Taxpayer. While I realize these items eventually enter into a manufacturing process by other parties, the exemption does not extend to the Taxpayer's activities, i.e. sorting.
In regard to the Taxpayer's activity of processing waste wood to pulp, SIC code 2611 classifies establishment primarily engaged in manufacturing pulp from wood or other material to be industrial processors. Due to the fact that this activity clearly causes a product (waste wood) to undergo a treatment to render such product more useful (pulp used for fuel), I find this portion of the Taxpayer's operation to enjoy the "industrial processing" exemption.
Based on the above, the audit will be adjusted accordingly. If you should have any question, please feel free to contact the department.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6725K
Rulings of the Tax Commissioner