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
10-16-1996
October 16, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter in which you seek correction of the sales and use tax audit of ***********(the "Taxpayer") for the period of October 1992 through September 1995.
FACTS
The Taxpayer is a manufacturer of plastic bottles. The Taxpayer's process involves the heating of solid resin chips until they become a viscous liquid, injecting the liquid into a mold, and then cooling the mold to create a bottle. The cooling of the molds is accomplished by injecting cooling water through minute water passages surrounding the molds. In order to ensure that the water passages remain clear and free of corrosion, the cooling water is treated with preventive chemicals. The auditor held the chemicals taxable as preventative maintenance. The Taxpayer feels that the water treatment chemicals are used directly in maintaining the integrity of the product being produced and is therefore exempt from the tax. The Taxpayer feels this is also true in the case of water softeners held taxable in the audit.
The Taxpayer is also taking exception to the application of the sales and use tax to water cooling tower support structures. The cooling tower is used to cool the water used in the process outlined above. The cooling of the water takes place as hot water from the manufacturing process is pumped to the top of the tower and is cooled as the water trickles to the bottom of the tower as a result of gravitational properties. In order for this process to operate correctly, the cooling tower must be elevated fifteen feet. The Taxpayer contracted to have the platforms fabricated and installed to support the water towers. The Taxpayer takes the position that the platforms are part of the manufacturing machinery and exempt from tax.
DETERMINATION
Code of Virginia § 58.1-609.3(2), copy enclosed, provides an exemption from the retail sales and use tax for "machinery or tools or... supplies... used directly in... manufacturing or processing products for sale or resale." (Emphasis added). The term "used directly" is defined in Virginia Regulation (VR) 630-10-63, copy enclosed, as "those activities that 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, management or administration."
The Virginia Supreme Court, in the case of Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E. 2d 252 (1978), held that chemicals used in the maintenance of the taxpayer's boiler were taxable. VR 630-10-63 provides, in part, that tangible personal property used in maintenance of production machinery is taxable.
While I am cognizant of the fact that the present case does not involve "boiler" chemical, the chemicals in each case are used in an identical manner, i.e., corrosion inhibition, scaling prevention, and microbiological fouling prevention, of exempt production machinery. It is the department's position that chemical used to prevent corrosion, scaling, etc., is not "used directly" in production as an integral part of the process as required by Code of Virginia § 58.1-609.3(2) and VR 630-10-63. An item may be essential to the business of a manufacturing operation and not be an immediate part of actual production.
In regard to the cooling tower platform, VR 630-10-63.B(2) provides for the following:
-
- Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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 and processing even though such items may be directly attached to exempt production machinery.
This regulation goes on to state that "steel or similar supports which are a component part of exempt machinery and which do not become permanently affixed to realty are not subject to the tax." As understood by this office, the platforms in question were not purchased as a component part of the cooling towers, but were fabricated and installed by an outside contractor. While these platforms may be necessary to provide the necessary elevation in order for the downward flow of the water to take place, the department does not feel this is a direct use, and in accordance with the regulation, the platforms would be taxable.
If you should have any questions, please contact******** , Office of Tax Policy, at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11376K
Rulings of the Tax Commissioner