Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Repair of airplane parts
Topic
Taxability of Persons and Transactions
Date Issued
06-22-1994
June 22, 1994
Re: §58.1-1821 Application: Sales and Use Tax
§58.1-1824 Protective Claim for Refund
Dear***************
This will reply to your letter of May 12, 1993 in which you seek correction of a recent sales and use tax audit of your client,********************(the Taxpayer), for the period of February, 1990 through September, 1992.
FACTS
The Taxpayer is in the business of overhauling, restoring, rebuilding and repairing airplane parts for various air carriers and commercial operators. The Taxpayer's operation is two-fold. One aspect of the Taxpayer's operation involves a procedure called "zero-timing." Zero-timing is taking a worn aircraft part, i.e. landing gear and propellers, and restoring the part to an "as new" condition as required by Federal Aviation Administration (FAA) specifications. Due to the amount of time necessary to rebuild equipment such as a landing gear and propellers (2 to 6 months), and the costliness of such equipment, the Taxpayer maintains an inventory for exchanges to avoid down time by the airlines. The exchange program operates in the following manner. An airline delivers a worn piece of equipment to the Taxpayer. The Taxpayer withdraws an identical piece of equipment from their inventory in exchange. The worn piece of equipment is rebuilt to zero-timing condition by the Taxpayer and placed in their inventory to be exchanged for another worn part. The second aspect of the Taxpayer operation involves the repair of customer owned parts which are returned to the customer upon-completion (not exchanged).
The Taxpayer feels that in accordance with the Code of Virginia, the Retail Sales and Use Tax Regulations, and their classification under the Standard Industrial Classification (SIC) Manual, they qualify as an industrial manufacturer and they should enjoy the exemption on all equipment used directly in their manufacturing operation. The Taxpayer is seeking correction of the recent sales and use tax audit assessment, and has also filed a protective claim for refund for erroneously paid sales tax for the last three years.
DETERMINATION
Va. Code §58.1-609.3(2) exempts from the retail sales and use tax "machinery or tools or repair parts therefore or replacement parts thereof, fuel, power, energy, or supplies, used directly in processing or manufacturing... products for sale or resale". Virginia Regulation (VR) 630-10-63(B) defines industrial processors to be "engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable. Products need not undergo a change in state or form in order for an establishment to be classified as an industrial processor".
Further, Va. Code § 58.1-602 indicates that the industrial manufacturing exemptions be applicable primarily to "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual...".
A review of the SIC Manual shows that businesses engaged in the manufacture of aircraft parts and auxiliary equipment, including landing gear and propellers, are classified in SIC code 3728. Therefore, this activity is deemed to be industrial in nature, and equipment and other items used predominantly and directly in this activity qualify for the industrial manufacturing exemption.
This leads to the question of whether or not customer-owned equipment being rebuilt or repaired qualifies as a "sale or resale". VR 630-10-90, copy enclosed, generally considers "repair" transactions to involve the sale of tangible personal property. Likewise, the fabrication of customer-owned property is deemed to be a sale as set forth in VR 630-10-37, copy also enclosed. Additionally, the department has previously ruled that similar industrial-type operations involved in the repair and overhaul of railway cars, mining machinery, and ships and vessels enjoy the exemption provided in Va. Code §58.1-609.3(2).
Accordingly, equipment used directly in the rebuilding and restoring of aircraft parts will be removed from the audit. Also, a representative from the department will contact the Taxpayer to verify any overpaid sales tax covered under the Protective Claim for Refund filed with your appeal.
If you should have any further questions, please feel free to contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner