Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Ventilation fans and lighting
Topic
Taxability of Persons and Transactions
Date Issued
03-14-1994
March 14, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter seeking correction of sales and use tax assessed to ***********(the Taxpayer), as the result of an audit for the period July, 1988 through March, 1991 .
FACTS
The Taxpayer operates as a steel fabricator engaged in the construction and repair of barges. The Taxpayer protests the department's audit results regarding the taxability of: 1) tuff skin bulbs, 2) flashlights and flashlight bulbs, and 3) ventilation fans. The Taxpayer maintains that the aforementioned items are used directly in its production process and thus should qualify for exemption under Virginia Regulation (VR) 630-10-63 (Manufacturing). Additionally, the Taxpayer contends that the ventilation fans qualify for exemption under VR 630-10-65.2 (Mining and Mineral Processing in that the extraction process discussed in the above regulation is similar to its production process.
DETERMINATION
Tuff skin bulbs, flashlights and flashlight bulbs
Va. Code §58.1-608(A)(3)(b) provides an exemption for industrial manufacturing and processing and exempts, "[m]achinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale ...". (Emphasis added).
Operating supplies which are actively and continually consumed in the operation of exempt machinery and equipment, are deemed used directly in manufacturing or processing and are not subject to the tax.
In the instant case, the tuff skin bulbs are used to provide lighting to the workers' temporary worksites within the steel hull of the barge. Moreover, the flashlights and flashlight bulbs are used to enable workers to move around within the barge and also for quality assurance inspection purposes. The fact that tuff skin bulbs, flashlights and flashlight bulbs are used for illumination purposes inside confined spaces does not qualify such items for exemption. I will agree that these items facilitate the Taxpayer's production process; however such items are not used directly in the construction of the barge.
Notwithstanding, the tuff skin bulbs flashlights and flashlight bulbs will be removed from the audit due to their exempt status in the previous audit. For the future these items will be deemed taxable. I have enclosed P.D. 92-139 (8/10/92) which further discusses items which are indispensable to a production process.
Ventilation Fans
The above cited Code section also provides an exemption for tangible personal property used directly in certain aspects of the process of mining. VR 630-10-65.2 exempts ventilation fans when used in the extraction process. The Taxpayer's purchases of ventilation fans do not qualify under the above regulation as the Taxpayer is not engaged in mining and thus does not participate in any extraction process.
VR 630-10-63(C)(2) addresses the application of the tax to ventilation fans in relation to manufacturing as follows:
-
- "[t]angible personal property used for general plant lighting, heating, air conditioning, ventilation, etc., unless such property is specifically designed to protect the integrity of products"...
The Taxpayer indicates the ventilation fans are used to facilitate air circulation within temporary worksites during the production process. It is my conclusion that these fans are used primarily to create an appropriate comfort level for workers engaged in the production process. Therefore, purchases of ventilation fans do not qualify for exemption from the tax as their purpose is ancillary to the production process. I have enclosed P.D. 91-206 (9/6/91) which discusses ancillary activities regarding manufacturing production processes.
It is my understanding that the department has revised the audit regarding the tuff skin bulbs prior to the decision rendered in this letter. The auditor will also make the necessary adjustment to remove the flashlights and flashlight bulbs from the audit assessment. Accordingly, the Taxpayer will receive an updated "Notice of Assessment" reflecting the revisions and the recomputation of interest accrued through February 18, 1992 which should be paid within 30 days to avoid the accrual of additional interest charges and collection activity.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6043J
Rulings of the Tax Commissioner