Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling or refining; Industrial materials, machinery, fuels and supplies
Topic
Exemptions
Date Issued
11-12-1996
November 12, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment for **********(the "Taxpayer"), for the period December 1991 through November 1994. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a manufacturer, was assessed use tax on untaxed purchases of certain supplies and equipment used in connection with dies and molds. The auditor took the position that the items at issue were used in taxable repair and maintenance functions. The Taxpayer contends that the purchases qualify for the industrial manufacturing exemption provided in Code of Virginia § 58.1-609,3(2), as they are used directly in the production process.
DETERMINATION
Generally: Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery, tools, fuel, power, energy, or supplies "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 or administration." (Emphasis added).
Virginia Regulation (VR) 630-10-63 provides that the exemption applies to "machinery, tools, and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." (Emphasis added). Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
In view of this background, I will address each of the issues raised by the Taxpayer.
Sump pumps: The pumps are located on the bottom of the metal stamping press with sub floor scrap conveyors. Scrap metal falls down into a scrap pit with oil waste from production. The scrap metal is conveyed to an outside hopper and the oil is pumped into a drum for disposal.
Based on the facts presented, the pumps do not qualify for the manufacturing exemption as they are not used directly in manufacturing. The pumps are located under production machinery to get rid of waste and are not an immediate part of the production process. Accordingly, the auditor correctly included the pumps in the audit.
One ton lift/hoist and slings: The lift is used to elevate parts to the production line conveyor. The slings are used with overhead cranes and fork trucks to move steel coils and to adjust molds in the plastic injection machines.
Under VR 630-10-63, tangible personal property used on the plant site to convey raw materials from storage to the production line, or from one step of production to another, is exempt. In this case, if the preponderance of use of the lift is to transport materials which become a component part of the product from one step of the production area to another, the lift qualifies for the manufacturing exemption. On the other hand, if the lift is used 50% or more of the time to convey items other than raw materials (e.g., repair parts for machinery), the exemption is not available.
A review of your letter and the audit report reveals that sufficient information is not available to determine the exact use of the lift. I will refer this matter to the auditor, who will review the use of the lift/hoist and make a determination consistent with the policy outlined above.
The slings are used to lift steel coils and adjust molds; these items are not raw materials. The slings are not used directly in the production of a product and, therefore, the manufacturing exemption does not apply.
Equipment, tools, and supplies used to prepare dies and molds: The Taxpayer contends these items qualify for the manufacturing exemption because they are used in sub-processing activities which produce tangible personal property used directly in the main manufacturing or processing activity. The Taxpayer's position is that the dies and molds are clearly used directly in the manufacturing process. The equipment, tools, and supplies at issue are used in "reprocessing" the dies and molds for the next production run. The reprocessing is not general, but specific for each die or mold to meet customer requirements.
The dies and molds are clearly used directly in the manufacturing process. The issue is whether the process used to prepare the dies and molds for the next production run constitutes taxable general maintenance or an exempt subprocessing activity.
In Public Document (P.D.) 94-28 (3/2/94), the department found the extensive nature of the procedure in cleaning extrusion tubes went beyond general maintenance and qualified as the reprocessing of equipment used directly in industrial manufacturing. In that case, the tubes were sandblasted, baked, and recoated. In P.D. 82-26 (3/24/82), the manufacturing exemption was extended to a subprocessing activity in which a printing cylinder was dechromed, de--etched and replated with copper in preparation for subsequent use.
In the Taxpayer's case, there is no documentation provided to indicate the molds and dies undergo a procedure as extensive as those in the cited public documents to qualify as a subprocessing activity. Based on the information provided, the procedure used in preparing the molds and dies is analogous to the procedure considered in P.D. 92-139 (8/10/92). In that case, the department ruled that a grinding machine and related equipment used on production dies to meet sensitive quality requirements were not used directly in the actual production of a product (subprocessing) and were not actively and continuously used in maintaining production machinery.
Based on the information provided, the preparation of the dies and molds does not qualify as a subprocessing activity. The equipment, tools, and supplies are used in a taxable maintenance function. Accordingly, there is no basis to remove the items from the audit.
Maintenance parts/supplies: The Taxpayer states these parts and supplies are carried as an inventory item and disbursed for use based on work orders. The work is performed to either replace worn or broken parts or to set up new equipment for production.
The Taxpayer correctly states that replacement parts for exempt production equipment are tax exempt. See VR 630-10-630(C)(2). In this case, the auditor found there was no breakdown between parts and supplies used in maintenance and repair and parts and supplies used for exempt production equipment. Without such a breakdown, the auditor properly included all the items in the audit.
If the Taxpayer can provide documentation to the auditor indicating the parts and supplies used as repair or replacement parts to replace worn or damaged parts on exempt production machinery, those items will be removed from the audit.
Milling machine (record 865): Based on a review of the audit, I agree that record 865 is a duplicate entry (duplicates record 1000). Record 865 will be removed from the audit.
Heater probe assembly: This item was installed in special molds to insure the condition during the injection of melted plastic resin.
Under Code of Virginia § 58.1-602, manufacturing includes production line quality control. Based on the information provided, the assembly, located within the molds, acts directly on the product and protects the integrity of the product during the production process. Under Code of Virginia § 58.1-602, manufacturing includes equipment and supplies used for production line testing and quality control.
Accordingly, the heater probe assembly will be removed from the audit upon verification by the auditor that the equipment is used as stated.
Summary: The duplicate entry for the milling machine will be removed from the audit. The Taxpayer will be contacted by the *****District Office within two weeks of this letter to arrange a mutually agreeable time to review the use of the lift/hoist and heater probe assembly and documentation relating to the breakdown of maintenance parts and supplies used as replacement parts for exempt production equipment. Once that review is completed, the audit will be revised in accordance with this letter and a revised assessment will be issued.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10013F
Rulings of the Tax Commissioner