Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Water purification equipment and supplies
Topic
Taxability of Persons and Transactions
Date Issued
06-23-1994
June 23, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This will reply to your recent correspondence in which you seek correction of a sales and use tax assessment for your client,************** (the "Taxpayer") for the period from January 1989 through November 1991.
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 determine the proper degree of water purity required by the 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.
The Taxpayer was audited by the department and tax was assessed on the purchase of supplies and equipment. The Taxpayer maintained that it qualifies for the industrial manufacturing exemption under Va. Code § 58.1-609.3(2)(i).
In a previous ruling, it was determined that the manufacturing exemption was not available because there was no evidence that the Taxpayer produced products for sale or resale, as required under Virginia Regulation (VR) 630-10-63. You request a reconsideration of the prior ruling and have provided additional information.
DETERMINATION
Under VR 630-10-63, in order for a business to qualify for the manufacturing exemption, (1) it must produce products for sale or resale, and (2) such production must be industrial in nature.
Based on the additional information provided, including customer invoices, it is evident that sales of the products produced by the Taxpayer occurred during the audit period. Therefore, the first requirement set forth above is satisfied.
Va. Code §58.1-602 provides that the term "industrial in nature" shall include those businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual. A review of the SIC manual reveals that businesses engaged in the manufacturing of water purification equipment and water treatment equipment are classified in SIC Code 3589; businesses engaged in manufacturing water treating compounds are classified in SIC Code 2899. Therefore, this activity is deemed to be industrial in nature, and items purchased and used directly in manufacturing water purification and water treatment equipment qualify for the exemption.
As noted in the department's previous ruling, the regeneration of the tanks and cleaning of the resins for water purification systems sold to customers are services to those customers and do not qualify for the manufacturing exemption; purchases in connection with these services are subject to the tax.
I have requested the department's audit staff to review the audit of the Taxpayer in light of these findings and make the appropriate adjustments to the assessment. If you have any questions regarding this matter or if any contested issues remain after the auditor's review, please do not hesitate to contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8105F
Rulings of the Tax Commissioner