Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Frozen foods production
Topic
Taxability of Persons and Transactions
Date Issued
08-26-1994
August 26, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This is in response to your letter of June 27, 1994 in which you seek correction of a sales and use tax assessment issued to***************** (the Taxpayer) for the period July 1989 through December 1991. I understand that based on prior correspondence the assessment was revised in February 1994 but that certain issues remain unresolved.
FACTS
The Taxpayer is a manufacturer operating a food processing plant in Virginia. The major items under protest which the Taxpayer maintains are not subject to the tax under the industrial manufacturing and processing exemptions are: i) air handlers which are used in the warehouse to maintain a refrigerated environment for the Taxpayer's frozen foods, and ii) a printing system and related parts and supplies used to code packaged products. The Taxpayer also indicates that certain other items of tangible personal property included in the assessment are used directly in exempt manufacturing activities.
DETERMINATION
Each of the issues raised will be addressed separately as follows:
Air handlers: Pursuant to Va. Code §58.1-602:
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- Manufacturing [and] processing includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site, and also includes equipment and supplies used for production line testing and quality control. (emphasis added)
It is evident that the storage area must remain refrigerated to protect the product. Nevertheless, in this instance the product is finished and completed and has been transported to the warehouse. The air handlers in the finished goods storage are used in an activity beyond the limits of production as defined in the statute and are therefore taxable. Conversely, air handlers used in the production area are not taxable and were not included in the assessment.
Code printing system: This system is part of the packaging function in that it prints an hourly coding on each product package which provides information relative to product batching. This batching information is used when the Taxpayer needs to notify customers about a particular product batch.
As noted above, exempt activities extend "through the last step of production where the product is finished or completed for sale." Also, Virginia Regulation (VR) 630-10-63(C)(2) provides that the exemption applies to "packaging equipment and supplies used at the plant site in packaging products for sale or resale."
In this instance the code printer is used on the production line at the plant site. Further, the Taxpayer's product is not ready for sale or resale until the hourly coding and batching information is printed on the product. Accordingly, the coding system is used in an exempt activity and will be removed from the assessment.
Other purchases: Other items under protest, including replacement parts for computer equipment that drives production machinery, gaskets and other replacement parts for food processing and packaging machinery, and vinyl powdered gloves provided to production personnel to protect the integrity of the product, will be removed from the assessment.
However, gear oil and other lubricants will remain in the assessment. This determination is based on VR 630-10-63(C)(2) which provides that tangible personal property used in the servicing or maintenance of production machinery is taxable.
Accordingly, the assessment will be revised to remove the items noted above. revised assessment, with interest accrued to date, will be issued to the Taxpayer as soon as practicable.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8196I
Rulings of the Tax Commissioner