Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Test equipment and barrier cream
Topic
Taxability of Persons and Transactions
Date Issued
06-07-1996
June 7, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter of February 22,1996 in which you seek correction of the sales and use tax audit of ***** (the "Taxpayer") for the period of August 1992 through July 1995.
FACTS
The Taxpayer is a manufacturer of carbone brushes for electrical application in the automotive industry. The Taxpayer is taking exception to the application of tax to "motor test equipment" and "barrier cream". These issues will be discussed separately below.
DETERMINATION
Motor Test Equipment
This equipment consists of various motors used to test manufactured brushes. Once the brushes have been completed and stored in boxes for shipping, they are randomly tested in motors to determine if they meet customer specifications. The Taxpayer considers this testing to be the final phase of production and exempt from the tax 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 and 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, "equipment used for Production line testing or quality control is classified as exempt production machinery". (Emphasis added). This section goes on to provide that "testing for the purpose of improving administrative efficiency or any other testing not relating to quality control is taxable."
Based on the information provided to this office, and the Code of Virginia and regulation section cited above, I cannot agree that the motor test equipment qualify for the exemption as being used directly in the manufacturing process. It has been the longstanding policy of the department that test equipment used for quality control purposes must be used directly on the production line in order to qualify for the exemption. In the present case, the test motors are used to test finished products, away from the production line, in order to ensure they meet customer specifications. For this reason, the department finds no basis for removing the test motors from the audit.
Barrier Cream
The "barrier cream" is a cream used by production employees to repel harmful and hazardous dust particles of lead, copper, carbon, and graphite during the production process. The Taxpayer feels this cream qualifies as protective apparel furnished to production line employees as provided in VR 630-10-63(C)(2).
While I am cognizant that the exemption afforded under VR 630-10-63(C)(2) specifically pertains to "apparel" furnished to production line employees, the department does not consider barrier cream to be apparel. "Apparel" is defined in The American Heritage Dictionary as, "clothing, esp. outer garments; attire." The department is bound by the doctrine of strict construction in interpreting the retail sales and use tax regulations. The Virginia courts have consistently held that exemptions from the tax must be strictly construed and where there is any doubt, that the doubt must be resolved against the person claiming the exemption.
Based on the facts presented and the mandate of strict construction, the department has no alternative but to find that "barrier cream" does not qualify as "apparel" in the true meaning of the word. In light of the above, the department finds no basis for removing the "barrier cream" from the audit findings.
If you should have any questions, please contact ****, Office of Tax Policy,*************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10985K
Rulings of the Tax Commissioner