Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Chemical manufacturing equipment
Topic
Taxability of Persons and Transactions
Date Issued
04-03-1996
April 3, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will reply to you letter of May 25, 1995 in which you seek correction of the retail sales and use tax audit of ***** (the "Taxpayer") for the period of August 1991 through July 1994.
FACTS
The Taxpayer is in the chemical manufacturing business. As the result of a recent sales and use tax audit, the Taxpayer is taking exception to three items held taxable. The Taxpayer is contesting the taxing of the Boom Containment on the******* , a Mod 300 Workstation, and a truck silo used to store finished product.
DETERMINATION
Boom Containment
Based on the pollution control certification received by Department of Taxation from the Department of Environmental Quality, the Boom Containment System on the **** will be removed from the audit.
Mod 300 Workstation
This work station allows database configuration and application development to be performed and completed at the Taxpayer's main plant, and subsequently transferred by modem to the Taxpayer's other locations. This system, also referred to as a Distributive Control System, is also used to develop simulations that can be used for training and as a sales tool. Basically, the system allows for the sharing of technology and information between plant sites. The Taxpayer takes the position that this system is used in research and development in order to develop new products and improve existing products and is therefore exempt from the tax.
Code of Virginia § 58.1-609.3(5) provides a sales and use tax exemption for, "tangible personal property purchased for use of consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." (Emphasis added). In order to meet the research and development exemption, the two-prong test of "directly and exclusively used" and "experimental or laboratory sense" must be met. While the Mod 300 Workstation may be used for some aspects of research and development, it is also used for training, as a sales tool for licensing technology, and as a modem for disseminating information to other plant sites. Based on these factors, the appeal to remove the Mod 300 Workstation from the audit cannot be sustained. In addition, based on the information provided, it is apparent that the Mod 300 Workstation is not used in the "experimental or laboratory sense" as defined in Virginia Regulation (VR) 630-10-92.E, Experimental and laboratory defined, (copy enclosed).
Truck Silo
The final area of contention involves the taxing of a truck silo used to store finished product. The silo is designed to allow cargo trucks to drive under the silo and the product, which is in the form of pellets, is then blown into the trucks. The Taxpayer feels the silo constitutes the final step of the production process and is therefore exempt.
VR 630-10-63.C.2 (copy enclosed) described those activities that are part of the production process and states, in part, the following:
-
- "Production" 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.
As provided in your letter, you manufacture pellets at your plant site. The pellets which the truck silo stores are finished products completed for sale. VR 630-10-63.C.2 addresses the distribution function of an industrial manufacturer and states, in part, "all tangible personal property used to convey, transport, handle, store, market or display finished products is taxable". (Emphasis added). Therefore, the truck silo which stores finished product would be taxable.
Based on the above, the audit will be revised to remove all equipment which has been certified as pollution control by the Department of Environmental Quality and a revised assessment will be issued. If you should have any further questions, please contact ****Office of Tax Policy, at*****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9958K
Rulings of the Tax Commissioner