Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling or refining; Industrial materials, machinery, fuel and supplies
Topic
Taxability of Persons and Transactions
Date Issued
10-15-1996
October 15, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
In your letter, you seek correction of the sales and use tax audit assessment issued to*******(the Taxpayer). I apologize for the delay in responding to your letter. Copies of all references are enclosed.
FACTS
The Taxpayer is an industrial printer. An audit for the period October 1991 through December 1994 resulted in an assessment of use tax on untaxed purchases of tangible personal property which were determined to be used indirectly in the Taxpayer's manufacturing process. With regard to the tax assessed on cylinder pallets and mezzanines, the Taxpayer maintains that such items are used directly in its manufacturing process and thus qualify for the exemption from the retail sales and use tax under Code of Virginia § 58.1-609.3(2).
Cylinder pallets are rectangular shaped steel frames used to store printing cylinders which are used on printing presses. These pallets also serve to protect the soft metal etchings contained on the printing cylinders. When a printing cylinder is needed for a production run, it is transported from storage to the press and mounted on the press. After the production run, the printing cylinder is placed on the pallet and returned to storage. The Taxpayer maintains that the cylinder pallets preserve or protect the quality of the finished product.
Concerning the mezzanines, one is a freestanding, rolling catwalk used to gain access to the printing press for repair, maintenance, or handling misfeeds. Other mezzanines are walkways which are constructed to provide access to the electrical control panel or other controls of the printing press. The Taxpayer indicates that these mezzanines are attached to the printing press. Accordingly, the Taxpayer maintains that these mezzanines are exempt component parts of production equipment.
The last mezzanine at issue is a structure attached above an ink dispenser which holds the ink containers. The ink is fed by gravity to the dispenser where buckets are filled and then taken to the printing press. No part of this mezzanine is attached to realty. The Taxpayer maintains that this mezzanine is a component part of the ink dispenser and thus used directly in the exempt storage of raw materials.
The above mezzanines were purchased separately from the printing press.
DETERMINATION
Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the retail sales and use tax for machinery or tools used directly in manufacturing or processing products for sale or resale. [Emphasis added.] The term "used directly" is defined by Virginia Regulation 630-10-63(B)(2) which provides that machinery or tools "used directly" in the production process are those that are indispensable to the actual production of products for sale and used as an immediate part of such production process.
Cylinder Pallets
The terms "manufacturing" and "processing" as defined by Code of Virginia § 58.1-602 include "equipment and supplies used for production line testing and quality control." [Emphasis added.] Based on this statute, it has been the department's consistent policy that the manufacturing exemption does not extend to equipment used in pre-production or post -production quality control activities.
In this case, the cylinder pallets are used to store component parts of exempt machinery (i.e., the printing cylinders) and to transport such cylinders between the production line and storage or from storage at the plant site to an off-site processor for recycling. Although cylinder pallets are needed to protect the etchings on the cylinders during transport and storage, at no time are the pallets used in production line testing or quality control activities. Rather, these pallets only serve an indirect role in protecting the integrity of the product by protecting the printing cylinder before it is used in the production of the product. Accordingly, the function of these pallets is a step removed from the production process. As such, these pallets are not an immediate part of the actual production of the product and thus do not qualify for the manufacturing exemption.
Mezzanines (Catwalks)
Virginia Regulation 630-10-63(B)(2) provides, in part, the following:
-
- Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., Q items which are essential to the operation of all business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery. [Emphasis added.]
Accordingly, the fact that an item is essential to production is not sufficient grounds for exemption unless the essential item is an immediate part of the actual production of the product. For this reason, the department has consistently held that catwalks are not "used directly" in manufacturing. Although catwalks may be an essential part of production as they provide access to production equipment, they do not serve an immediate part in the actual production of the product. Regardless of whether attached to exempt production equipment, the mezzanines at issue are not "used directly" in production and thus are not eligible for the manufacturing exemption.
Mezzanines for ink dispenser
Although the manufacturing process begins with the handling and storage of raw materials and the ink dispenser in this case is a part of that exempt process, I cannot agree that the mezzanine suspending the ink dispenser is used directly in the production process.
In a related case, the department determined in P.D. 91-183 (8/26/91) that steel supports which are not attached, bolted or welded to exempt machinery are not a component part of such machinery and are taxable. Conversely, when freestanding steel legs or other supporting structures are attached to exempt machinery and used solely to support exempt machinery, and the machinery cannot be operated without such supports, the steel becomes a component part of the machinery and the exemption applies.
According to the auditor, the mezzanine for the ink dispenser is not attached to the ink dispenser and provides access to the ink dispenser. Since this mezzanine serves other functions in addition to its use as a support and is not attached to exempt machinery, it is not a component part of the ink dispenser. For these reasons, the mezzanine for the ink dispenser was correctly held taxable in the audit.
Based on all of the foregoing, I find no basis to revise the assessment. Based on the circumstances of this case and under the authority of Code of Virginia § 58.1-105, I will agree to waive the interest that has accrued on the assessment since August 16, 1995, provided the Taxpayer pays the outstanding liability of******* within the next 60 days. The Taxpayer will receive an updated bill under separate cover.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9793R
Rulings of the Tax Commissioner