Tax Type
Retail Sales and Use Tax
Description
Construction; Manufacturing, Photo finishing equipment and HVAC repairs
Topic
Taxability of Persons and Transactions
Date Issued
02-28-1995
February 28, 1995
Re: §58.1-1821 Application: Sales & Use Tax
Dear***************
This will reply to your letter of August 11, 1994 in which you seek correction of a retail sales and use tax assessment for *****************(the "Taxpayer").
FACTS
The Taxpayer operates photo finishing facilities across the country. The department conducted an audit of its three Virginia locations in******************. At the ********** location the department assessed tax on the purchase of a temperature monitoring alarm used on film and paper processors to monitor the temperature of the chemicals used in the processing operations. In the*******and********** locations, the department assessed tax on purchases of parts used in the repair of HVAC systems.
With regard to the replacement temperature monitoring alarm, the Taxpayer cites Virginia Regulation (VR) 630-10-63, stating the tax does not apply to repair parts when used directly in manufacturing or processing. Additionally, the Taxpayer states that the equipment upon which the repair part is being placed was originally purchased complete with the monitoring alarm attached.
The Taxpayer also provides that the purchase of the HVAC repair parts is not taxable since the contractor repairing the HVAC system is the user and consumer of the parts in the repair of real property. The Taxpayer states that the sales tax is the responsibility of the contractor.
The Taxpayer therefore requests that the audit be adjusted to remove these purchases from the audit calculations.
DETERMINATION
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 processing, manufacturing,... products for sale or resale;..." (Emphasis added). The term "used directly" is then defined under Code of Virginia §58.1-602 as follows:
"Used directly, " when used in relation to manufacturing, processing,... refers to 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 or administration."
The film and paper processors were previously purchased exclusive of the tax due to the fact that they were exempt equipment used directly in processing products for sale or resale. Since the exempt equipment was purchased with the temperature monitors attached the purchase of new temperature monitors as repair parts for this equipment will also be exempt.
Pursuant to VR 630-10-63, HVAC systems generally are not deemed to be used directly in manufacturing or processing products for sale or resale. Nonetheless, HVAC systems often become improvements to realty. Therefore, in such an instance, an installing contractor is considered to be the ultimate consumer and must pay the tax on the purchase of the HVAC system and all supplies and materials used in its installation and repair. Since the system in question was a part of real estate, the department will remove the repair transaction from its audit.
Additionally, it is my understanding that your company is issuing certificate of exemption forms to various vendors, such as the company responsible for repairing the HVAC system. Please note that the exemption certificates are restrictive in their wording and that all purchases are not covered by such certificates. If you are in need of assistance or are unsure as to the proper application of tax, the department will be happy to assist you. With regard to your issuance of these exemption certificates, a representative from the district office will contact you to advise you on their proper use.
Based on all of the foregoing, the audit will be returned to the department's district office and the assessment will be revised accordingly.
If you require any further assistance, please contact*************with the department's Office of Tax Policy at*************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner