Tax Type
Retail Sales and Use Tax
Description
Manufacturing; Chip collection system; Height Block gage
Topic
Taxability of Persons and Transactions
Date Issued
02-27-1995
February 27, 1995
Re: §58.1-1821 Application: Sales & Use Tax
Dear***************
This replies to your letter of August 8, 1994 concerning your protest of certain property included in the department's audit of *************(the "Taxpayer"), for the audit period July 1990 through December 1992.
FACTS
The Taxpayer has established a manufacturing facility in *********, Virginia. This facility manufactures engine bearings, bushings and washers. The department's audit assessed tax on a chip collection system and a height test block gage.
The chip collection system collects metal shavings during the manufacturing process, and operates in connection with various production machinery. The Taxpayer has presented data to reflect that the chip collection system reduces the "scrap rate" or damage to bearings from metal chip accumulation. The Taxpayer also notes that the system is primarily a continuous collection system to increase the quality of parts being manufactured.
During the manufacturing process, the bearings are also measured by a height block gage to ensure that they meet proper specifications. These gages are required to be tested periodically for proper calibration when used in the measurement of the bearings. The height test block gage is the instrument used in such testing.
DETERMINATION
In regards to the chip collection system, Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in... manufacturing... products for sale or resale". The term "used directly" is defined in Code of Virginia §58.1-602 as "those activities which are an integral part of the production of a product,... but not including ancillary activities such as general maintenance and administration".
In interpreting the above statute, Virginia Regulation (VR) 630-10-63.B.2 provides that "convenient or facilitative items,... or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing." Subsection C.2 of this same regulation defines those items used in manufacturing activities which are deemed to be taxable. The subsection specifically states that "tangible personal property used for general plant lighting, heating, air conditioning, ventilation, etc., unless such property is specifically designed to protect the integrity of products" is subject to tax.
The Chip Collection System removes metal chips which otherwise could damage bearings under production. The system was acquired specifically to reduce the volume of bearings that were being scrapped. As such, the system is used directly in exempt production line quality control.
Although the height block gage itself is used directly in production line quality control, the instrument used to measure the gage is subject to the tax. VR 630-1063.C.2 provides various examples of taxable items used in production, including "tangible personal property used in repair, servicing and maintenance of production machinery. "
The audit will be adjusted and a revised assessment issued. Please return your company's check to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23282-1880. If you have any questions or require any further information regarding this matter, please contact***********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8865Q
Rulings of the Tax Commissioner