Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Business products manufacturer
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 reply to your letter in which you seek correction of a sales and use tax assessment issued to ****** (the"Taxpayer") for the period October 1991 through February 1995. I note that the assessment has been paid.
FACTS
The Taxpayer, a manufacturer, is engaged in the production of high quality business products, i.e., printers, copiers, and cartridges. The Taxpayer takes exception to certain purchases of equipment and supplies held taxable in the audit and maintains that they are exempt items used directly in the manufacturing process. In addition, the Taxpayer takes exception to certain computers held taxable and maintains that the computers qualify for exemption from the tax under the research and development exemption.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for machinery 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, 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(B)(2) further defines the term "used directly", noting that "items of tangible personal property which are used directly in manufacturing...are machinery, tools, and repair parts therefor, fuel, 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." This section continues, "integrated manufacturing includes the production line of a plant...starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished...and conveyed to a warehouse at the plant site...."
Keeping the above in mind, I will address each of the issues raised by the Taxpayer separately.
Solid Waste Conveyor
The solid waste conveyor is used to carry corrugated, plastic and foam materials from the production line to the central recycling area. The Taxpayer maintains that the solid waste conveyor is exempt from the sales tax and is certified by the Department of Environmental Quality as exempt pollution control equipment.
Code of Virginia § 58.1-609.3(9) exempts certified pollution control equipment from taxation. In this case, the Taxpayer provided the department with a proper certification qualifying the solid waste conveyor as exempt pollution control equipment. Accordingly, the audit will be revised and a refund of tax and interest submitted on this item will be issued.
Magnetic Tape and Tray Store Out Labels
The magnetic tape is used to guide automatic guided vehicles that deliver raw materials from the storage area to the production line. The tape is affixed to the floor in a manner that will allow the Taxpayer to periodically move the magnetic tape when necessary to reroute the automatic guided vehicles to deliver products to a different location.
The tray store out labels are placed on boxes of parts and raw materials. The labels identify the part number, line and address location in the Automatic Storage and Retrieval System (ASRS). When parts are needed on the production line, the ASRS automatically conveys the parts to the location indicated on the tray store out label.
VR 630-10-63(C)(2) defines production to "include 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...and conveyed to a warehouse at the plant site...." Based on the information provided, the magnetic tape and the labels are an essential part of the storage and handling of raw materials at the plant site. The audit will be revised and a refund of the tax and interest submitted on these items will be issued.
Die Table, Die Washer Enclosure, and 20MM Reamer
The "Die Table" is located away from the production line and is used to work on the dies for cleaning, repairing, and making adjustments. The table is also used to assemble parts for the die.
The die washer enclosure is a component of the die washer. The die washer is placed inside the die washer enclosure which is used to remove residue resulting from the combination of additives and polymer plastic utilized in the production process. The dies are cleaned by high pressure water that cuts through the urethane build-up.
The 20MM Reamer is a tool used for drilling holes out of die manifolds so new or replacement parts will fit on the dies. This function is performed when new or replacement parts for the die are placed on the existing die and the holes in the new part do not line up with the holes in the die.
The high pressure die washer and related equipment were addressed in the prior audit. In the enclosed P.D. 92-139 (8/10/92), the department determined that while the high pressure die washer and related equipment perform functions that maintain the production equipment and are necessary to carry on production, they are not used directly in the actual "production of a product," nor are they actively and continuously used in maintaining production machinery. The items are essential to the operation of the business but are not used directly in manufacturing and, therefore, are taxable.
Hygrometer and CMM Machine
The hygrometer is used in the electrical lab to measure temperature and humidity in equipment when defects are found in the product. The testing of the production equipment determines where the defects are occurring.
The CMM machine calibrates equipment used on production equipment. The CMM machine is also used to inspect incoming production parts to insure they are within required specifications and tolerance.
VR 630-10-63(C)(2) provides that equipment used for production line testing and quality control is exempt from taxation. This section continues "testing for the purpose of improving administrative efficiency or any other testing not relating to quality control is taxable." The department has interpreted this regulation to include only that equipment which is "used directly" in the quality control function on the production line of the plant site during the manufacturing process.
The hygrometer and the CMM machine are not used for production line testing and quality control during the manufacturing process. The equipment is located away from the production line and is used for testing parts and equipment and for calibrating tools used on production equipment prior and subsequent to production of the product and, therefore, does not qualify for the exemption.
NEC PC 980 NS-EZ Computers
The computers are used to test domestic grades of paper to find a paper that can be marketed specifically for The Taxpayer's products. The computers are not used for any other activity. The Taxpayer maintains that the ultimate goal of the testing is to develop new uses for existing products and the improvement of existing products.
Code of Virginia § 58.1-609.3(5) provides an exemption from the tax for "[T]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense. (Emphasis added).
The department's policy regarding this exemption is set out in VR 630-10-92 and defines "basic research as "a systematic study or search in a scientific or technical field of endeavor with the ultimate goal of advancing knowledge or technology in that field. Basic research in the experimental or laboratory sense is such research that is carried on in a laboratory environment or by experimental methods."
It is my understanding the audit supervisor from the **** District Office visited the Taxpayer and reviewed the use of the computers. As a result of that visit, it was determined that the only activity of the computers is to test domestic paper purchased from other vendors to find a grade of paper suitable for use in the Taxpayer's products. There is no evidence that the testing develops new uses or the improvement of existing products. Based on this analysis and information provided in your letter, the computers appear to be used primarily for feasibility testing. These activities, which focus on the analysis of different grades of domestic paper to determine a suitable paper for use in Taxpayer's products, do not fall within the scope of "basic research" and "research and development" provided in the regulation. For this reason, the exemption does not apply to the computers.
The assessment will be revised as set forth herein and a refund, with updated interest, will be issued. If you should have any further questions, please contact *** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9795T
Rulings of the Tax Commissioner