Document Number
Tax Type
Retail Sales and Use Tax
Delivery charges and packing costs; Single charge for "shipping and handling'
Taxability of Persons and Transactions
Date Issued

June 4, 1996

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


This will reply to your letter of April 11, 1996 in which you seek correction of the sales and use tax audit of ****** (the "Taxpayer") for the period of April 1992 through March 1995.


The Taxpayer is in the business of electronic equipment manufacturing. The Taxpayer is taking exception to application of tax to; i) equipment and supplies used in the pre-production process, ii) test equipment used during the manufacturing process, and iii) freight and handling charges. These issues will be discussed separately below.


Equipment Used in Pre-Production Process

The Taxpayer is taking exception to taxation of equipment and supplies used in pre-production activities. These items include a CAD system, drafting supplies, software, and other similar items used to provide drawings to engineering and production line personnel. The Taxpayer must also furnish such drawings to the customer. The Taxpayer feels these items are an integral part of the production process and are exempt under Code of Virginia § 58.1-609.3.2.

Code of Virginia § 58.1-609.3.2 provides an exemption from the sales and use tax for "machinery and tools... 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." The term "manufacturing" is defined in Code of Virginia § 58.1-602 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 the production where the product is finished and conveyed to a warehouse at the production site."

In addition, Virginia Regulation (VR) 630-10-63(C)(2) provides generally that, computers which are used to direct or control production line and/or quality control operations qualify for tax exemption. However, computers which are used to "produce production reports, make production information available to plant personnel, monitor the efficiency of production machinery, etc.,... are deemed to be taxable administrative items."

Based on the information provided in your letter, and the Code of Virginia and regulation sections cited above, I cannot agree that the CAD System and related drafting equipment qualify for the exemption as being used directly in the manufacturing process. While this equipment may be essential to provide information to production line personnel, and also a requirement of the contract, it is not an immediate part of the manufacturing process. Instead, this equipment is primarily used in pre-production activities, thus rendering such equipment taxable. [See P.D. 88-95 (5/10/88) enclosed].

Test Equipment

The second area in dispute involves the purchase of a "Cleanliness Tester" and a "Circuit Analyzer". As provided in your letter, the "Cleanliness Tester" is used to test printed circuit boards during assembly prior to the application of a conformal coating. The "Circuit Analyzer" is used to test fabricated and purchased cable for proper circuits and connections prior to installation in the production process. VR 630-10-63(C)(2) provides that equipment used for production line testing and quality control is exempt from taxation. This section goes on to provide that testing to improve administrative efficiency or any other testing not related to quality control would be taxable.

Based on the information provided, it is apparent that the "Cleanliness Tester" is used during the production process for quality control purposes and will be removed from the audit. The "Circuit Analyzer", from the information provided, appears to be used to test cables prior to installation in the production process. This being the case, the department finds no basis for exemption as this item is not testing the product being manufactured, instead it is testing items incorporated into production machinery. If the Taxpayer has additional information to substantiate the exempt use of the "Circuit Analyzer", I will be glad to revisit this issue.

Shipping and Handling

Finally, the Taxpayer is taking exception to the taxing of shipping and handling charges. Code of Virginia § 58.1-604 imposes the use tax on the cost price of each item of tangible personal property used or consumed in Virginia. Code of Virginia § 58.1-602 defines "cost price" as the actual cost of tangible personal property computed in the same manner as the sales price, without certain deductions. That same code section defines sales price, in part, as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale." "Handling charges" are considered a service in connection with a sale and are therefore taxable

VR 630-10-107 exempts from the tax separately stated transportation and delivery charges. "Transportation" and "delivery charges" are defined in the regulations as follows:
    • Charges for delivery from the seller to the purchaser, commonly known as "transportation-out," and includes postage or common carrier charges. Transportation and delivery charges do not include charges from a manufacturer to a retailer's place of business relative to purchases for resale, nor do they include handling charges. Emphasis added.

In this case, the Taxpayer failed to accrue the use tax on a lump sum amount charged by its vendors for nontaxable "shipping" charges and taxable "handling" charges. The auditor correctly held the total charge taxable. It is noted that the Taxpayer received several letters from suppliers setting forth their standard handling charges. In these instances, I will agree to only tax the standard handling charge and remove the shipping portion of such charges from the audit sample.

A representative from our**** District Office will contact you to arrange a time to make the revision set forth above. If you should have any questions, please contact **** Office of Tax Policy, at ******.


Danny M. Payne
Tax Commissioner


Rulings of the Tax Commissioner

Last Updated 09/16/2014 15:39