Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Paper recycling operation
Topic
Taxability of Persons and Transactions
Date Issued
10-25-1996
October 25, 1996
Re: § 58.1-1821 Reconsideration: Retail Sales and Use Tax
Dear**************
This will reply to your letter of October 11, 1996 in which you request a reconsideration of my May 16, 1996 determination for the audit appeal of **********(the "Taxpayer") for the period of June 1992 through May 1995.
FACTS
The department's original determination provided that the Taxpayer's paper recycling operation did not constitute "industrial" processing and did not enjoy the manufacturing exemption afforded under Code of Virginia § 58.1-609.3(2).
It is the contention of the Taxpayer that due to the sophisticated and highly technical process that the waste paper undergoes, that the industrial processing exemption is applicable. In addition to the sorting and baling process performed by the Taxpayer, the process also includes a number of mechanical treatments, including shredding, fluffing, compacting, compression, densifying, expansion, resistance expansion, moisturizing and water retention processing. The different treatments, or combination of treatments, depends on the individual customer's specification. The Taxpayer feels that the final product they sell has totally different technical characteristics from the initial characteristics of the waste paper product prior to the processing. The Taxpayer is requesting reconsideration of the department's original determination in which the department denied the industrial processing exemption.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts... or supplies used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale." In addition, Code of Virginia § 58.1-602 defines the term "used directly" as referring to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process." The issue in this case is whether the Taxpayer's recycling operation constitutes industrial processing and, therefore, qualifies for the exemption.
In Commonwealth of Virginia v. Orange-Madison Cooperative Farm Service, 220 Va. 655, 261 S.E.2d 532 (1980), the Virginia Supreme Court adopted the following definition of "processing":
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- To subject a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result: put through a special process" as ... (1) prepare for market, manufacture, or other use by subjecting to some process... (2) to make usable by special treatment.
Virginia Regulation (VR) 630-10-63.B provides that products need not undergo a change in state or form in order for an activity to be classified as industrial processing. In addition, the department has previously ruled that in order for processing to occur, a product need only undergo a treatment rendering the product more marketable or useful, provided of course that the processing is industrial in nature. See P.D. 87-274 (12/10/87).
Based on all of the above, and the additional information provided in your letter, I find that the Taxpayer's recycling operation constitutes industrial processing. Consequently, the machinery used to perform these processing functions, and the associated repair and replacement parts, would be exempt from the tax.
The audit will be revised in accordance with the above and a revised audit assessment will be issued. If you should have any questions, please contact ******, Office of Tax Policy, at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11722K
Rulings of the Tax Commissioner