Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Air conditioning and air filtration equipment
Topic
Taxability of Persons and Transactions
Date Issued
11-02-1995
November 2, 1995
Re: Request for Ruling: Retail Sales and Use Tax
Dear**********:
This will reply to your letter of October 2, 1995, in which you request reconsideration of a ruling regarding the application of the retail sales and use tax to certain equipment purchased by**************(the"contractor") under a contract to construct a facility for **************(the "Taxpayer").
The Taxpayer has entered into an agreement with the contractor to construct a yarn manufacturing facility in Virginia. Under the agreement, the contractor will purchase items which will be incorporated into the building for manufacturing purposes.
In two previous rulings, the department determined that the air conditioning and air filtration systems are not used directly in the production process and, therefore, do not qualify for the manufacturing exemption. You have provided additional information and request reconsideration of the department's position.
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for equipment used directly in manufacturing products for sale or resale. Code of Virginia § 58.1-602 includes equipment and supplies used directly in production line quality control within the scope of the manufacturing exemption.
The determination in the previous rulings (that the air conditioning and air filtration systems did not qualify for the manufacturing exemption) was based on the department's understanding that the systems are used to maintain the necessary environment for equipment to operate at optimum levels of efficiency. The department has consistently ruled that tangible personal property used to maintain the necessary environment for proper equipment operation is taxable, as it is not used directly in the production process.
Additional information has been provided which indicates the air conditioning and filtration systems' function is to guarantee the integrity of the Taxpayer's product in two ways. The air systems create an air flow in the production area necessary to keep lint accumulations at a minimal level to prevent product defects. In addition, the systems maintain the moisture content in the air at a particular level which is essential to the quality of the product.
Based on this new information, the air conditioning and filtration systems qualify as exempt production machinery, because they serve a quality control function critical to guaranteeing the integrity of the Taxpayer's product. Furthermore, the ductwork and motor control centers used to support the air systems are part of the production line quality control process and qualify for the manufacturing exemption.
It is my understanding that the concrete tunnels which return air to the systems are located underground. Under Virginia Regulation (VR) 630-10-63(C)(2), concrete and other materials which are a component part of exempt production machinery are exempt from the tax only if they do not become affixed to realty. In this case, the concrete tunnels are affixed to realty and, therefore, are subject to the tax.
If you have any questions regarding this ruling, or if the department can be of additional assistance, please let me know.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10346F
Re: Request for Ruling: Retail Sales and Use Tax
Dear**********:
This will reply to your letter of October 2, 1995, in which you request reconsideration of a ruling regarding the application of the retail sales and use tax to certain equipment purchased by**************(the"contractor") under a contract to construct a facility for **************(the "Taxpayer").
FACTS
The Taxpayer has entered into an agreement with the contractor to construct a yarn manufacturing facility in Virginia. Under the agreement, the contractor will purchase items which will be incorporated into the building for manufacturing purposes.
In two previous rulings, the department determined that the air conditioning and air filtration systems are not used directly in the production process and, therefore, do not qualify for the manufacturing exemption. You have provided additional information and request reconsideration of the department's position.
RULING
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for equipment used directly in manufacturing products for sale or resale. Code of Virginia § 58.1-602 includes equipment and supplies used directly in production line quality control within the scope of the manufacturing exemption.
The determination in the previous rulings (that the air conditioning and air filtration systems did not qualify for the manufacturing exemption) was based on the department's understanding that the systems are used to maintain the necessary environment for equipment to operate at optimum levels of efficiency. The department has consistently ruled that tangible personal property used to maintain the necessary environment for proper equipment operation is taxable, as it is not used directly in the production process.
Additional information has been provided which indicates the air conditioning and filtration systems' function is to guarantee the integrity of the Taxpayer's product in two ways. The air systems create an air flow in the production area necessary to keep lint accumulations at a minimal level to prevent product defects. In addition, the systems maintain the moisture content in the air at a particular level which is essential to the quality of the product.
Based on this new information, the air conditioning and filtration systems qualify as exempt production machinery, because they serve a quality control function critical to guaranteeing the integrity of the Taxpayer's product. Furthermore, the ductwork and motor control centers used to support the air systems are part of the production line quality control process and qualify for the manufacturing exemption.
It is my understanding that the concrete tunnels which return air to the systems are located underground. Under Virginia Regulation (VR) 630-10-63(C)(2), concrete and other materials which are a component part of exempt production machinery are exempt from the tax only if they do not become affixed to realty. In this case, the concrete tunnels are affixed to realty and, therefore, are subject to the tax.
If you have any questions regarding this ruling, or if the department can be of additional assistance, please let me know.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10346F
Rulings of the Tax Commissioner