Document Number
95-52
Tax Type
Retail Sales and Use Tax
Description
Computer aided design system (CAD); Manufacturing exemption
Topic
Exemptions
Property Subject to Tax
Date Issued
03-23-1995
March 23, 1995



Re: Request for Ruling: Sales and Use Tax



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

This will reply to the letter of March 15, 1994 in which previously with your firm, requested a ruling on the sales and use tax exemption status of your client,************* (the "Taxpayer").
FACTS

The Taxpayer contracts to design, engineer, and manufacture ship accouterments and metal products for the United States Government and commercial customers and prison cells for the state and local governments. Ship products include steel doors, berths, filing cabinets, door frames and toilets. The products produced by the Taxpayer are designed by the Taxpayer to customer's specifications using computer aided design (CAD) applications. The Taxpayer also designs and manufactures the tools, dies, and punches used directly in the manufacturing process. Final assembled products receive a protective coating and are placed on a conveyor where paint is applied through electromagnetic technology. Final products are inspected, tested, packaged, and assigned a unique code to identify the contract destination and design. The Taxpayer is requesting a ruling as to the sales and use tax application to its operation.
RULING

Code of Virginia §58.1-609.3(2) exempts from the retail sales and use tax "machinery or tools or repair parts therefor or replacement parts thereof, fuel, power, energy, or supplies, used directly in processing or manufacturing... products for sale or resale". (Emphasis added). Code of Virginia §58.1-602 defines "used directly", when used in relation to manufacturing and processing, to include "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 and administration".

In addition, Code of Virginia §58.1-602 indicates that the industrial manufacturing exemptions be applicable primarily to "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual...". A review of the SIC Manual shows that businesses engaged in the manufacture of furniture and fixtures for ships are classified in code 2599 of the SIC Manual. Therefore, this activity is deemed to be industrial in nature, and equipment and other items used predominantly and directly in this activity qualify for the industrial manufacturing exemption.

Virginia Regulation (VR) 630-10-63.B(2) (copy enclosed) expounds on the definition of "used directly" to include all steps of an integrated manufacturing process. The concept of the integrated manufacturing process encompasses exempt manufacturing machinery, tools, repair parts, fuel, power, energy and supplies used directly to manufacture or process fuel, power or energy used to run exempt machinery or to manufacture! exempt machinery, tools or supplies. In other words, the manufacturing exemption is available for subprocessing activities that produce tangible personal property used directly in exempt manufacturing or processing activities. Therefore, all tangible personal property used by the Taxpayer to produce tools, dies, and punches used in manufacturing would also enjoy the exemption..
    • Code of Virginia §58.1-602 further defines the term manufacturing as:

      the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site.
Based on the above, due to the fact the products manufactured by the Taxpayer are not completed for sale until the protective coating and paint is applied, these activities would also fall within the realm of the exemption. Likewise, product testing, product inspection, packaging and barcoding activities would all qualify for the exemption provided such activities are performed prior to conveyance of product to a finished goods inventory.

Inasmuch as the industrial exemption is limited by statute to the production line of a plant, preparatory steps that are preparatory to the actual production process are not within the scope of the industrial manufacturing exemption set forth above. Therefore, the CAD system would not enjoy the exemption. This has been the longstanding policy of the department as exhibited by P.D. 88-12 (114/88) and P.D. 91291 (11/18/91) enclosed.

If you should have any further questions, please feel free to contact the department.

                        • Sincerely,


                          Danny M. Payne
                          Tax Commissioner
OTP/7737K

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46