95-38 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing, processing, assembling or refining; Exemptions

Topic

Taxability of Persons and Transactions

Date Issued

03-14-1995

March 14, 1995

Re: Request for Ruling: Retail Sales and Use Tax

Dear**********

This will reply to your letters of February 9, 1995 and February 22, 1995 in which you request a ruling on the application of the retail sales and use tax to certain equipment purchased by **********(the "Taxpayer") under a contract to construct a manufacturing facility.

FACTS

The Taxpayer is a general contractor and has entered into an agreement to construct a manufacturing facility in Virginia. Under the agreement, the Taxpayer will purchase items which will be incorporated into the building for manufacturing purposes. You ask for a ruling as to which items may be purchased exempt of the sales and use tax under Code of Virginia §58.1-609.3(2) based on a description of the equipment and its use in the manufacturing process.

RULING

Generally

Pursuant to Code of Virginia §58.1-610, contractors are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract. The same is also true for property furnished to a contractor upon which the tax has not previously been paid.

However, exceptions to these general rules are set forth in subsections B and E of §58.1-610 for property purchased by or furnished to a contractor that would otherwise enjoy one of the industrial exemptions under Code of Virginia §58.1 -609.3.

Code of Virginia §58.1 -609.3(2) provides an exemption from the sales and use tax for machinery, tools, fuel, power, energy or supplies "used directly" in manufacturing products for sale or resale. The term "used directly" is defined in Code of Virginia §158.1 -602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing...process, but not including ancillary activities such as general maintenance or administration."

Virginia Regulation (VR) 630-10-63 provides that the exemption applies to "machinery, tools, and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." (Emphasis added). Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.

In view of this background, and given the fact that the customer is clearly an industrial manufacturer, I will now address the availability of the manufacturing exemption to the equipment described in your letter.

Electrical substations

You have not provided information regarding the use of the electricity produced by the substations. Electrical substations are exempt from the tax to the extent that the electricity is used to power exempt production machinery or for production line testing. However, if the power is used for administrative, general lighting, heating or cooling purposes ancillary to production, the electrical substation is subject to the tax. If an electrical substation is used to power both exempt production machinery and nonexempt functions, the preponderance of use test set forth in VR 630-10-63.D (copy enclosed) will apply.

Bus ducts. cower panels. and volt feeders

Based on the information provided, the bus ducts and power panels are necessary to connect exempt production equipment with the wiring of the facility. Therefore, the bus ducts and power panels may be purchased exempt of the tax.

The 600 volt feeders are a component part of the production of power for production line equipment and, therefore, are used directly in the manufacturing process and qualify for the exemption.

The volt feeders used for incoming service are taxable, as they are not used directly in the manufacturing process; they are used in the production of power for the entire facility, including office areas.

Motor control centers and control wiring

It is not clear if the motor control centers are used to control machinery used directly in the industrial manufacturing process. If the machinery is used in such a manner, the motor control centers would be exempt. If the equipment is not used directly in production, but rather in an activity which is merely convenient or facilitates production, the motor control centers would be taxable. Similarly, the control wiring used for exempt production machinery would be exempt; control wiring for equipment which is not used directly in the manufacturing process is taxable.

Compressed air system

Based on the information provided, the compressed air system will be used to power equipment used directly in the manufacturing process. Therefore, the air compressors, their hoses and piping running from the compressor are exempt.

Filtration equipment

Information provided with your letter indicates that the filtration equipment is required to provide OSHA dust level compliance and to process waste handling.

As mentioned above, VR 630-3-63 specifically excludes items which are essential to the operation of a business but not an immediate part of actual production, as tangible personal property used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery.

The regulation further states ... "the fact that the use of a particular item ... may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing." In this case, the filtration equipment does not appear to meet the requirement for direct usage in the manufacturing or products for sale or resale nor is the primary purpose to protect the integrity of the product. Consequently, the equipment does not qualify for the exemption provided by Code of Virginia § 58.1-609.3(2).

process air conditioning

Based on the information provided, the process air conditioning is required by the manufacturing process to maintain temperature and humidity conditions for the manufacturing equipment to operate.

In this case, the air conditioning is not used directly in the actual production process within the meaning of the code sections and regulation cited above. The air conditioning is not required for the protection of the product itself, but is merely convenient or facilitative to production and is taxable pursuant to the Virginia Supreme Court's opinions in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973) and Webster Brick v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978). Furthermore, the department has consistently held that tangible personal property used to maintain the necessary environment for proper equipment operation is taxable. See Ruling of the Tax Commissioner dated March 19, 1982, copy enclosed.

Ductwork

Because the filtration equipment and process air conditioning are not exempt from the tax, the ductwork to support that equipment is not exempt. Similarly, the concrete tunnels and the penthouse of the HVAC system are taxable.

Enclosed are copies of Form ST-11 A, which must be presented by the Taxpayer to its supplier when purchasing items which qualify for the manufacturing exemption, as noted above. The forms are to be used for the construction project described in your letter and cannot be used after the completion date of the project and are not valid for use in conjunction with any other construction project performed by the Taxpayer.

If you have any other questions relating to the contractor's purchases and the application of the manufacturing exemption, you make contact***************.

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

OTP/9360F

Rulings of the Tax Commissioner