Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling or refining; Industrial processing exemptions; Packaging equipment
Topic
Taxability of Persons and Transactions
Date Issued
10-22-1996
October 22, 1996
Re: Request for Ruling: Retail Sales and Use Tax
"Fulfillment"
Dear***********
This will reply to your letter in which you request a ruling on the application of the industrial processing exemption to Fulfillment (the "Taxpayer"). I apologize for the delay in responding to you.
FACTS
The Taxpayer processes and packages sales orders placed by customers of an affiliated telemarketing company (the "Affiliate"). The Taxpayer maintains a sales inventory of various products in a warehouse. As sales orders are received from the Affiliate, the Taxpayer provides the service of pulling the products ordered, packaging and preparing the products for shipment, and shipping the orders to the Affiliate's customers. The Taxpayer uses automated equipment to provide this service and wishes to know if its operation qualifies for the industrial processing exemption. Specifically, the Taxpayer asks if equipment such as case erectors/sealers, conveyor systems, modifications to a tilt-tray sorter, and packing stations at the tilt-tray sorter would qualify for exemption from sales and use tax. The Taxpayer references P.D. 87--154 (6/2/87) in its request.
RULING
Code of virginia § 58.1-609.3(iii) (copy enclosed) provides a sales and use tax exemption for "[m]achinery or tools or repair parts therefor or replacements thereof, .... used directly in processing, manufacturing, .... products for sale or resale." Code of Virginia § 58.1-602 (copy enclosed) states that manufacturing and processing "... includes 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 or completed for sale and conveyed to a warehouse at the production site ..." Virginia Regulation (VR) 630-10-63(B)(2) (copy enclosed) states that "used directly" refers to "... those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration."
The department has determined that the manufacturing exemption only applies to those activities that are an integral part of the production of a product. The Taxpayer's activity of processing sales orders is not an integral part of a production process and the activity is not conducted at a plant site. The Taxpayer processes and packages orders for products that have already been manufactured and are ready for sale. VR 630-1 0-63(C)(3) defines "Distribution" as "... the transport or conveyance of products after the completion of production and is not part of manufacturing or processing." The Taxpayer's packaging services more closely resemble the distribution activities described above, which are taxable.
Based on the information provided by the Taxpayer, the manufacturing and processing exemption would not apply to the activities conducted in its warehouse operations. In P.D. 87-154, the taxpayer was mixing various ingredients together to create a finished product in marketable form. In addition, that taxpayer was manufacturing the packaging materials used to package and ship products. In this case, the Taxpayer is not manufacturing products for sale or resale, but merely providing packaging and distribution services to the Affiliate, who is a retailer.
I understand a member of my staff has previously discussed this matter with you and explained that the manufacturing and processing exemption would not apply to the Taxpayer's purchase of the equipment used in the warehouse operations. I hope the foregoing has addressed your concerns, but if you have any additional questions, please contact*******in the Office of Tax Policy at**********************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10436S
Rulings of the Tax Commissioner