Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Recycling equipment
Topic
Taxability of Persons and Transactions
Date Issued
05-16-1996
May 16, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will reply to your letter of June 29, 1995 in which you seek correction of the sales and use tax audit assessment of****** (the"Taxpayer") for the period of October 1991 through December 1993.
FACTS
The Taxpayer is a commercial printing company. As part of the printing process, eight to ten percent of the paper purchased turns into waste paper. During various stages of the printing process, waste paper is generated and is transferred to the baler room by forklift, motorized hand-truck, vacuum system or pneumatic conveyance. Once in the baler room, the paper is sorted into different grades prior to undergoing further processing. Once the paper is sorted, it gets shredded, compressed, bundled and conveyed to a storage area at the plant site. The waste paper bundles are then sold for recycling. During 1992 and 1993, the Taxpayer processed over 11.5 and 13.8 million pounds of waste paper, respectively.
The Taxpayer was audited and assessed tax on repair parts used to repair the shredder and the baler in the baler room and wire used to bale the paper. The Taxpayer feels the process of recycling the waste paper falls within the industrial manufacturing and processing sales tax exemption afforded under Code of Virginia § 58.1-609.3(2). Therefore, the repair and replacement parts for the baler and shredder held taxable in the audit should be exempt.
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":
-
- 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) to 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 the above, and the facts presented in your letter, I find that the Taxpayer's recycling operation constitutes industrial processing. The Taxpayer takes waste paper from its printing operation, sorts it, shreds it, compresses it, and bales it, making the paper more marketable and useful. Consequently, the machinery used to perform these processing functions, and the repair and replacement parts therefore, would be exempt from the tax.
The audit will be revised in accordance with the above and the appropriate refund will be issued. If you should have any questions, please contact***** Office of Tax Policy, at*************
.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10026K
Rulings of the Tax Commissioner