Document Number
95-43
Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Gantry units
Topic
Taxability of Persons and Transactions
Date Issued
03-17-1995

March 17, 1995



Re: §58.1-1821 Application: Retail Sales and Use Tax


Dear***************

This will reply to your letter of October 28, 1994, and prior correspondence in which you seek correction of a retail sales and use tax assessment of**************** (the "Taxpayer") for the period April 1990 through July 1993. I note that tax and interest on uncontested issues have been paid.
FACTS

The Taxpayer is a textile manufacturer specializing in the manufacture of towels and other woven products. The Taxpayer protests the tax on the purchase of gantry units which are used to support exempt manufacturing equipment. The Taxpayer also requests the waiver of penalties assessed.

Gantry units are used in the Taxpayer's weave room to support loom heads which feed threads to weaving looms used to manufacture towels. A gantry unit is a raised platform constructed of structural steel. It consists of a stairway, guard rails and flooring with openings in which loom heads are mounted. Rows of these structures extend across the plant floor approximately 200 feet. The flooring enables plant workers to walk along the platform, thus giving the workers access to the loom heads. Guard rails are used for safety purposes and stairways provide plant workers access to the platforms.

Threads are fed to the looms from both horizontal and vertical directions. Therefore, loom heads must be positioned above the looms to provide the necessary vertical feed. The gantry units provide the support needed to suspend the loom heads above the looms and stabilize the loom heads to prevent them from vibrating, thus insuring the quality of the manufactured product. By securing the loom heads at a fixed height above the looms, the gantry units also insure that the tension of the threads fed to the looms is constant.

The Taxpayer maintains that the gantry units are similar to "steel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty ...." Virginia Regulation (VR) 630-1063(C)(2) states that such items are not subject to the tax.
DETERMINATION

Code of Virginia §58.1-609.3 provides an exemption from the sales and use tax for "machinery or tools ... used directly in ... manufacturing or processing products for sale or resale. "(Emphasis added) VR 630-10-63(B)(2) indicates that in order for property to be used directly, it must be indispensable to the actual production of products for sale and it must be an immediate part of the production process. Convenient or facilitative items such as equipment supports are not used directly even though they may be attached to exempt production machinery.

It is the longstanding policy of the department that structural steel, special flooring, and similar structural materials do not meet the direct usage test. This issue was addressed by the Virginia Supreme Court in Webster Brick v. Commonwealth, 219 Va. 81, 145 S.E.2d 252 (1978) and Commonwealth v. Wellmore Coal, 228 Va. 149 (1984). In Webster Brick, exemption was denied for structural materials placed in the floor of a manufacturing plant for use as a trackage system. The court found the trackage system to be indispensable to the production of brick, but used only indirectly in production.

In the present case, the gantry units help expedite production and quality control but do not play an immediate role in the production or quality control processes. The gantry units support the weight of the loom heads and are also used as walkways by plant workers to access the loom heads. The gantry unit guard rails serve a safety function by preventing plant workers from falling while on the platforms. The department has previously determined in P.D.91-183 (8126191, copy enclosed) that supporting structures must be used solely to support exempt machinery to be considered a "component part" of such machinery. Because the gantry units serve other functions in addition to their use as supports, they are not considered a component part of the loom heads. Based on the above, the gantry units were correctly held taxable in the audit.

In regard to assessed penalty charges, the department's records indicate this is the fourth audit of the Taxpayer. The penalty was assessed in accordance with Code of Virginia section 58.1 -635 and VR 630-10-80. The regulation states, in part:
    • The application of penalty to audit deficiencies is mandatory, and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio...Penalty will generally be applied [to second generation audits unless the taxpayer's compliance ratios meet or exceed 85 % for sales tax and 60% for use tax... Penalty will generally be applied [to all subsequent generation audits] unless the dealer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. The application of penalty to audit deficiencies will not be waived on second and subsequent audits for other than exceptional mitigating circumstances. (Emphasis added)
The Taxpayer states that the error factor computed in the most recent audit sample was lower than the factor computed in its previous audit and the audit purchase measure represents less than one percent of total expenditures made during the audit period. The department appreciates that the Taxpayer paid the sales tax to vendors on the preponderance of its taxable purchases. Yet, the Taxpayer showed a low use tax compliance ratio in those instances when vendors did not charge the tax. Accordingly, penalty was properly assessed since the Taxpayer did not satisfactorily comply with the requirement for paying the use tax.

The department's policy in regard to this issue is based on a clear distinction between a sales tax and a use tax. This policy has been consistently applied as addressed in the enclosed P.D. 92-100 (6115192). Notwithstanding the above, the purchase of gantry units appears to be a new issue. Accordingly, the penalty on these particular purchases will be removed from the assessment.

The remainder of the assessment is correct. A revised bill will be mailed to you under separate cover and may be paid within thirty days to avoid the accrual of additional interest. You may send payment to ***********if you have any questions.

                      • Sincerely,



                        Danny M. Payne
                        Tax Commissioner

OTP/8735S

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46