Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling or refining; Seafood processing equipment
Topic
Taxability of Persons and Transactions
Date Issued
05-30-1996
May 30,1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will respond to your letter of April 21, 1996 in which you seek correction of a sales and use tax assessment issued to ********(the "Taxpayer").
The Taxpayer operates as a seafood processor whose activities include the picking and packing of crabs. As a seafood processor, the Taxpayer qualifies for the industrial manufacturing exemption set out in Code of Virginia § 58.1-609.3(2). An audit for the period January 1993 through December 1995 resulted in an assessment primarily for certain untaxed purchases. The Taxpayer protests that portion of the assessment on untaxed purchases of (1) welding supplies used to repair exempt production equipment; (2) paper and cleaning supplies; and (3) insecticides and other items used to prevent contamination of the product. The Taxpayer also protests the assessment on rental charges paid for gas storage tanks.
Code of Virginia § 58.1-609.3(2) 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 ... products for sale or resale." The term "used directly" is defined in § 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.
Virginia Regulation (VR) 630-10-63(B)(2) interprets these statutes by providing that:
Further, in the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in a statute was intended to narrow the scope of the exemption. An exemption, therefore, applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products.
With this in mind, each of the issues raised by the Taxpayer will be addressed as follows:
Welding Supplies: The Taxpayer uses metal baskets and kettles as an integral part of its processing activity. Repairs to these exempt items are often made through welding. VR 630-10-63(C)(2) provides that tangible personal property used in the repair, servicing, and maintenance of production machinery is taxable. Replacement parts for exempt production machinery are exempt.
The auditor exempted welding rods, wire and other steel because these items become a component part of the exempt baskets and kettles. Other welding supplies, including gases and safety materials, were held as taxable. The Taxpayer contends that all welding materials and supplies are an integral part of the welding process of an exempt activity.
Based on the doctrine of "direct use" as discussed above, welding is not an exempt activity. Rather, the repair of equipment is an activity which is one step removed from the Taxpayer's food processing. The supplies at issue are an integral part of the welding. They are not, however, an integral part of the Taxpayer's actual production process.
Paper and Cleaning Supplies: Cleaning items include degreasers used on the picking tables twice a day, disinfectants used weekly on metal pans, and concrete cleaners which are used to clean the floors once a day, and soap used by production personnel. Paper items include toilet paper for the bathrooms and paper towels used by production personnel while operating machinery and picking crabs.
I understand that the auditor did not assess bleach, disinfectants, and other sanitation supplies which are continually used to clean containers and pans throughout the production process. These items are used continuously in the production process to protect the integrity of the product.
You contend that all cleaning supplies are necessary to maintaining a sanitary condition which guarantees the integrity of the product and are therefore exempt from the tax. Your contention is based in part on Public Document 95-129 in which the department extended the exemption to a "clean room" used in the manufacture of semiconductors. In that case the exempted items were an integral part of a total environmental control system specially designed to eliminate contamination.
VR 630-10-63(C)(2) provides that tangible personal property used in maintenance of production machinery is taxable. The contested items in this case are used periodically, but are not in active and continuous use on the production line. Accordingly, I find no basis for removing these items from the assessment. In addition, I have enclosed Public Document 94-330 which upholds this position and which is analogous with the issues contained herein.
I also find no basis to remove the paper products used by employees. These items, including those used by personnel to dry their hands during the production process, are convenient and facilitative items which are not used directly in the production process.
Insecticides: You maintain that these items are an integral part of the packing room and used to protect the food from contamination. You further maintain that these items are also required by law. In addition to the insecticides, the Taxpayer protests the tax on plastic strip door materials which prevent insects from entering the production area.
I appreciate that these items are necessary to the Taxpayer's processing and are required by law. As indicated in the regulation and in the discussions above, the insecticides and plastic strips are not used or consumed immediately in the production process and are thus not exempt items.
Rental of Gas Storage Tanks: Carbon dioxide gas is used by the Taxpayer directly in its processing activity to quick freeze its product. The gas itself is used directly in the processing and is therefore an exempt item. The tanks in which the gas is stored are not used directly in the processing activity. See the attached Public Document 90-215 (12/5/90) which addresses the department's policy on the lease or rental of gas cylinders to industrial manufacturers.
Public Document 95-129 on which you rely addresses storage tanks which were used to store raw materials used in the manufacturing process. Under the definition of "manufacturing" found in Code of Virginia § 58.1-602, the handling and storage of raw materials at the plant site is an exempt production activity. Further, Public Documents 95-67, 94-250, 94-252, and 94-260 address the application of the tax primarily to exempt manufacturing, processing, and mining activities and to equipment and machinery used directly in those activities.
Based on the above, the assessment is correct. If you have any questions, however, please contact ***** in my Office of Tax Policy***********
Danny M. Payne
Tax Commissioner
OTP/11174I
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will respond to your letter of April 21, 1996 in which you seek correction of a sales and use tax assessment issued to ********(the "Taxpayer").
FACTS
The Taxpayer operates as a seafood processor whose activities include the picking and packing of crabs. As a seafood processor, the Taxpayer qualifies for the industrial manufacturing exemption set out in Code of Virginia § 58.1-609.3(2). An audit for the period January 1993 through December 1995 resulted in an assessment primarily for certain untaxed purchases. The Taxpayer protests that portion of the assessment on untaxed purchases of (1) welding supplies used to repair exempt production equipment; (2) paper and cleaning supplies; and (3) insecticides and other items used to prevent contamination of the product. The Taxpayer also protests the assessment on rental charges paid for gas storage tanks.
DETERMINATION
Code of Virginia § 58.1-609.3(2) 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 ... products for sale or resale." The term "used directly" is defined in § 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.
Virginia Regulation (VR) 630-10-63(B)(2) interprets these statutes by providing that:
-
- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor ... 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. Convenient or facilitative items ... or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing.... Furthermore, 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.
Further, in the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in a statute was intended to narrow the scope of the exemption. An exemption, therefore, applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products.
With this in mind, each of the issues raised by the Taxpayer will be addressed as follows:
Welding Supplies: The Taxpayer uses metal baskets and kettles as an integral part of its processing activity. Repairs to these exempt items are often made through welding. VR 630-10-63(C)(2) provides that tangible personal property used in the repair, servicing, and maintenance of production machinery is taxable. Replacement parts for exempt production machinery are exempt.
The auditor exempted welding rods, wire and other steel because these items become a component part of the exempt baskets and kettles. Other welding supplies, including gases and safety materials, were held as taxable. The Taxpayer contends that all welding materials and supplies are an integral part of the welding process of an exempt activity.
Based on the doctrine of "direct use" as discussed above, welding is not an exempt activity. Rather, the repair of equipment is an activity which is one step removed from the Taxpayer's food processing. The supplies at issue are an integral part of the welding. They are not, however, an integral part of the Taxpayer's actual production process.
Paper and Cleaning Supplies: Cleaning items include degreasers used on the picking tables twice a day, disinfectants used weekly on metal pans, and concrete cleaners which are used to clean the floors once a day, and soap used by production personnel. Paper items include toilet paper for the bathrooms and paper towels used by production personnel while operating machinery and picking crabs.
I understand that the auditor did not assess bleach, disinfectants, and other sanitation supplies which are continually used to clean containers and pans throughout the production process. These items are used continuously in the production process to protect the integrity of the product.
You contend that all cleaning supplies are necessary to maintaining a sanitary condition which guarantees the integrity of the product and are therefore exempt from the tax. Your contention is based in part on Public Document 95-129 in which the department extended the exemption to a "clean room" used in the manufacture of semiconductors. In that case the exempted items were an integral part of a total environmental control system specially designed to eliminate contamination.
VR 630-10-63(C)(2) provides that tangible personal property used in maintenance of production machinery is taxable. The contested items in this case are used periodically, but are not in active and continuous use on the production line. Accordingly, I find no basis for removing these items from the assessment. In addition, I have enclosed Public Document 94-330 which upholds this position and which is analogous with the issues contained herein.
I also find no basis to remove the paper products used by employees. These items, including those used by personnel to dry their hands during the production process, are convenient and facilitative items which are not used directly in the production process.
Insecticides: You maintain that these items are an integral part of the packing room and used to protect the food from contamination. You further maintain that these items are also required by law. In addition to the insecticides, the Taxpayer protests the tax on plastic strip door materials which prevent insects from entering the production area.
I appreciate that these items are necessary to the Taxpayer's processing and are required by law. As indicated in the regulation and in the discussions above, the insecticides and plastic strips are not used or consumed immediately in the production process and are thus not exempt items.
Rental of Gas Storage Tanks: Carbon dioxide gas is used by the Taxpayer directly in its processing activity to quick freeze its product. The gas itself is used directly in the processing and is therefore an exempt item. The tanks in which the gas is stored are not used directly in the processing activity. See the attached Public Document 90-215 (12/5/90) which addresses the department's policy on the lease or rental of gas cylinders to industrial manufacturers.
Public Document 95-129 on which you rely addresses storage tanks which were used to store raw materials used in the manufacturing process. Under the definition of "manufacturing" found in Code of Virginia § 58.1-602, the handling and storage of raw materials at the plant site is an exempt production activity. Further, Public Documents 95-67, 94-250, 94-252, and 94-260 address the application of the tax primarily to exempt manufacturing, processing, and mining activities and to equipment and machinery used directly in those activities.
Based on the above, the assessment is correct. If you have any questions, however, please contact ***** in my Office of Tax Policy***********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11174I
Rulings of the Tax Commissioner