Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Cleaning and sanitizing equipment
Topic
Taxability of Persons and Transactions
Date Issued
03-02-1994
March 2, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This is in response to your letter of April 9, 1993 whereby you seek correction of a sales and use tax assessment issued to*****************(the Taxpayer). I note that the entire assessment has been paid.
FACTS
The Taxpayer is a manufacturer of plastic products. An audit for the period April 1989 through May 1992 created an assessment for the Taxpayer's failure to pay the tax on purchases of certain tangible personal property. The Taxpayer contests the tax assessed on equipment and supplies used in four areas of its operation.
DETERMINATION
Each of the issues raised by the Taxpayer will be addressed separately as follows:
Cleaning of extrusion tubes: During the manufacturing process melted resin is forced through extrusion tubes. After each production run the tubes must be thoroughly cleaned of all resin residue. The removal of residue must be performed after every production run to allow the extrusion tubes to be used in subsequent production, and the Taxpayer indicates that the cleaning procedure occurs two or three times each day.
To carry out this procedure, the extrusion tubes are removed from the extruder to an area specifically designed to perform the cleaning process. The process itself involves i) sandblasting the inside of the tubes, ii) baking the tubes to remove any remaining residue, and iii) recoating the inside of the tubes with teflon paint.
Va. Code §58.1-609.3(2) provides an exemption from the tax for machinery and tools used directly in manufacturing products for sale or resale. Va. Code §58.1-602 defines "used directly" to include "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance ...." (emphasis added)
In addressing these statutes, Virginia Regulation (VR) 630-10-63 (B)(2) provides that the concept of the integrated manufacturing process includes within the scope of the exemption "machinery, tools, repair parts, ... used directly to manufacture ... exempt production machinery, tools or supplies." This same section further provides that "an exemption is available for subprocessing activities which produce tangible personal property used directly in the main manufacturing or processing activity."
The extrusion tubes are clearly used directly in the Taxpayer's industrial manufacturing operation. The question before us then is whether the process used to remove residues from the inside of the tubes constitutes taxable general maintenance or an exempt subprocessing activity.
I find in the instant case that the extensive nature of the procedure which involves sandblasting, baking and recoating the extrusion tubes goes beyond general maintenance. Rather, I find that the process is analogous to the situation described in Public Document 82-15 (3/24/82) which addresses the reprocessing of equipment which is used directly in industrial manufacturing.
Accordingly, tangible personal property used predominantly and directly in removing residue in the manner described is deemed exempt from the tax.
Cleaning and sanitizing of monocast molds: The monocast operation involves placing monomer and other raw materials into a mold to form tubular bars, rods and plates. In some instances a press plate is used to apply pressure to the mold.
As with the extrusion operation, the molds, press plates and certain other manufacturing equipment used in the monocast operation cannot be used again until they are thoroughly cleaned with stainless steel sponges after each production run.
The enclosed P.D. 92-139 (8/10/92) addresses an analogous situation describing the cleaning of polymer residue from production dies. In that ruling it was determined that equipment used in this cleaning function was necessary to carry on production, but was not used directly in the actual production of a product. Based on that determination, the tax on steel sponges is deemed to be correct as assessed.
Boiler treatment chemicals: Hot water boilers are utilized to generate steam, 90 percent of which is used in various manufacturing functions. The Taxpayer contends that water treatment chemicals, used to prevent scaling and lime buildup, keep the boilers operating efficiently and are therefore used directly in manufacturing.
The department has previously determined that such chemicals are not an immediate part of the production process and are therefore not used directly in manufacturing. These chemicals are thus subject to the tax. See the attached P.D. 85-208 (10/31/85).
Protective clothing: The Taxpayer maintains that protective shoes and gloves are provided at no cost to selected employees engaged in manufacturing operations, and the Taxpayer's purchase of these items is specifically exempt under the manufacturing and processing regulations.
VR 630-10-63 (C)(2) provides that the exemption applies to "safety apparel furnished gratuitously to production line employees; however, safety apparel furnished to non-production line employees is taxable...."
It is my understanding that these contested purchases of gloves and shoes were charged to accounts reflecting "construction and repair" expenses. Since such personnel are not production line employees as specified in the regulations, the exemption does not apply.
Accordingly, the assessment will be revised to remove tangible personal property used in the extrusion tube process. Based on that revision, a refund will be issued to the Taxpayer as soon as practicable.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6936I
Rulings of the Tax Commissioner