Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Shrimp processing
Topic
Taxability of Persons and Transactions
Date Issued
03-20-1995
March 20, 1995
Re: §58.1-1821 Application: Sales & Use Tax
Dear*********
This will reply to your letter of October 31, 1994 in which your company,**********(the "Taxpayer"), protests certain areas of the department's sales and use tax audit.
FACTS
The Taxpayer operates a shrimp processing plant. At the completion of the cooking stages of processing, the shrimp are removed from the cooker and subjected to a chilled water system which halts the cooking process and preserves the quality of the product. In the chilling process, phosphates and oils are released by the shrimp causing a foam buildup which reduces the ability of the chilled water system to pump chilled water. Anti-foam chemicals are introduced into the system which reduce the foam buildup, thereby allowing the system to continue running. The Taxpayer also provides that a secondary benefit of the anti-foam chemical is that in its contact with the shrimp it causes a reduction of the oily coating which is formed when the shrimp is subjected to the chilled water system.
The Taxpayer disagrees with the taxation of the anti-foam chemicals as well as plastic aprons purchased and furnished to employees to protect their clothing from the water and cold. The Taxpayer maintains that these items are used directly in the processing operations, and therefore requests an adjustment to the audit.
DETERMINATION
Code of Virginia §58.1-609.3(2) provides an exemption from the sales and use tax for tangible personal property 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 or administration."
The anti-foaming chemical when used in the chilled water process, mixes with the water and the product. The main purpose of the chemical is to reduce the buildup of foam which could cause a shutdown of the chilled water process and thereby cause the shrimp to be overcooked. Additionally, while the chemical removes foam from the shrimp, it also removes the oil film coating released from the shrimp.
While the anti-foam chemical serves a role in the general maintenance of the processing operations, a taxable activity as stated above, it also acts upon the product itself to remove possible contaminants. Accordingly, I find that the antifoaming chemical is used directly in the processing operations. The department's audit will be adjusted to remove the chemical.
With regard to the use of the plastic aprons, the Virginia Regulation (VR) 63010-63(C)(2) provides examples of taxable and nontaxable items. It specifically exempts, "[s]afety apparel furnished gratuitously by manufacturer to production line employees...." While the aprons are furnished to "production line employees," they are not provided for the protection of the employee. A review of the audit reveals that you stated that the aprons are for the purpose of protecting employees' clothes from water. As such, the aprons facilitate processing by enhancing the comfort of the employees, but are not essential to protect the employee from injury. Likewise, the aprons do not enhance the quality of the product. Therefore, the aprons are not "used directly" in processing.
Based on all of the foregoing, the audit will be adjusted and a revised assessment will be issued as soon as practicable. If you should have any questions regarding the department's audit, please contact***********with the department's***********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8904Q
Rulings of the Tax Commissioner