Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Industrial cleaning chemicals
Topic
Taxability of Persons and Transactions
Date Issued
11-19-1996
November 19, 1996
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
In your letter of October 15, 1996, you seek correction of the consumer use tax assessment issued to ******* (the Taxpayer). Copies of all references are enclosed.
FACTS
The Taxpayer is a manufacturer of industrial felts. An audit for the period September 1993 through June 1996 resulted in an assessment of use tax on various untaxed purchases.
The Taxpayer takes exception to the tax assessed on chemicals used to clean the Teflon roll covers on the dryers after a special treatment is applied to the felts. According to the Taxpayer, the cleaning is necessary to prevent the special treatment from contaminating felts subsequently processed on the dryers. The Taxpayer maintains that the cleaning chemicals are used directly in the manufacturing process and are therefore not subject to the tax.
According to the department's auditor, roll covers are cleaned after each batch (i.e., felts of a similar type) or when the Taxpayer switches to a different type of felt to produce. The auditor indicates that cleaning of the roll covers is sometimes performed on a daily basis but is usually performed after several days of production.
DETERMINATION
The Taxpayer's contentions are based on Public Document (PD) 92-65 (5/11/92). In that document, the department granted the exemption to sanitizing chemicals as being an indispensable part of the quality control function of the manufacturing process. Virginia Regulation (VR) 630-10-63(B)(2) provides that the integrated manufacturing exemption extends to production line testing and quality control. In the above cited case, the entire production process was shut down daily in order to sanitize it. Also, the daily cleaning was so specialized and closely related to the processing function that production could not take place unless the cleaning and sanitization of the production equipment was performed.
VR 630-10-63(C)(2) provides that tangible personal property used in servicing and maintenance of production machinery is taxable. This regulation further provides that only those "operating supplies which are actively and continually consumed in the operation of exempt machinery and equipment, are deemed used directly in manufacturing or processing and are not subject to the tax." In PD 92-139 (8/10/92), the department determined that cleaning "performed every two or three days" did not constitute "active and continuous" use.
The facts presented in this case clearly show that the Taxpayer's equipment cleaning activities are sporadic and are not performed on a regular daily basis. Rather, it has been shown that equipment is normally cleaned following several days of production. Accordingly, the facts do not support a conclusion that the chemicals at issue are actively and continually consumed in the production process, or are so specialized and closely related to the processing function that production must be interrupted throughout the day to clean the production equipment. For these reasons and the fact that the cleaning chemicals are clearly consumed in the maintenance of production equipment, a taxable activity, l find no basis for removing these items from the audit findings.
If you have not already paid the assessment, please send payment to the address listed on the department's assessment, or to the attention of***************at the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11790R
Rulings of the Tax Commissioner