Tax Type
Retail Sales and Use Tax
Description
Manufacturing; Remanufacture of customer-owned machinery
Topic
Taxability of Persons and Transactions
Date Issued
05-17-1995
May 17, 1995
Re: §58.1-1821 Application: Sales and Use Tax
Dear**************
This will reply to your letter of January 12, 1995 in which you seek correction of a sales and use tax assessment issued to***************("the Taxpayer") for the period August 1991 through July 1994.
FACTS
The Taxpayer is engaged primarily in the business of manufacturing pump parts and the rebuilding of customer-owned pumps, valves, and major components thereof. In addition, the Taxpayer engages in other activities outside Virginia which consist of on-site repairs of valves, pumps, and other equipment. Trailers are equipped with parts and portable equipment used in connection with these out-of-state repair activities.
The Taxpayer maintains that its Virginia activity entails the complete remanufacture of the customer-owned machinery by disassembling and installing new parts according to precise engineering specifications and standards. The Taxpayer further maintains that the remanufacturing activities are exempt from the tax under the manufacturing and processing exemption provided in Code of Virginia § 58.1-609.3(2).
In addition, the Taxpayer raises questions regarding the taxation of photogrammetric services. In this process, the Taxpayer transforms photographs taken of specific nuclear power valves to produce precise internal measurements of such equipment. These measurements are provided to the customer in a "data package" which consists of the photogrammetric drawings, computer disk, and photographs of the specified valves.
The Taxpayer maintains that the "true object" sought by the client is the Taxpayer's professional engineering skills and that the tangible personal property is insignificant in comparison to the services provided.
Lastly, the Taxpayer requests that penalty charges in connection with the contested issues be abated.
DETERMINATION
I will address each contested issue below.
Industrial manufacturing exemption:
Code of Virginia §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 a way that renders 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."
Additionally, as provided in Code of Virginia §58.1-602 "[i]ndustrial in nature" includes, but is not limited to, those businesses in codes 10 through 14 and 20 through 39 published in the Standard Classification Manual for 1972 and any supplements issued after that.
A review of the SIC Manual shows that businesses engaged in the manufacturing of pumps and pump equipment and valves and pipe fittings are classified in SIC Codes 3561 and 3494. Therefore, these activities are deemed to be industrial in nature, and equipment and other items used predominantly and directly in those activities qualify for the industrial manufacturing exemption. Therefore, equipment used directly in the rebuilding of pump parts, valves, and major components thereof will be removed from the assessment.
Photogrammetry:
The department previously addressed the issue of photogrammetric services in the enclosed P.D. 95-90 (04128195).
In that case, it was determined that the provision of photogrammetric plat reports represents a nontaxable service rather than a sale of tangible personal property. The "true object" being the professional skill and ability in transforming photographs into detailed three-dimensional plats. The plat reports were deemed insignificant in comparison to the service being provided.
In this case, the client is seeking the Taxpayer's professional skill and ability to produce accurate internal measurements of nuclear valves using photogrammetry. The photographs by themselves would serve no real value to the client. Therefore, I find that the tangible personal property provided by the Taxpayer in connection with photogrammetric services to be exempt. Accordingly, these items will be removed from the assessment.
Penalty:
VR 630-10-80 provides for the mandatory application of penalty to second and subsequent audits. Assessment of penalty on audits is determined by the level of compliance exhibited by taxpayers. Compliance on third generation audits, as in the instant case, must be at least 85 percent on purchases in order to avoid penalty charges. The Taxpayer's use tax compliance of 17 percent was below an acceptable level of compliance; therefore, penalty was assessed. However, to the extent audit adjustments are made pursuant to this determination which may result in an acceptable compliance ratio, the penalty will be adjusted accordingly.
If you should have any further questions regarding this determination, you may contact********************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/9172P
Rulings of the Tax Commissioner