Tax Type
Retail Sales and Use Tax
Description
Water treatment system for dry kiln boiler
Topic
Property Subject to Tax
Date Issued
03-03-1997
March 3, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear********************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to **************** (the Taxpayer) for the period October 1993 through August 1996.
FACTS
The Taxpayer, a manufacturer, is engaged in the production of lumber. A part of the manufacturing process involves the use of dry kilns in the drying process of the lumber. At issue is the tax assessed on the purchase of a water treatment system used in connection with the boiler that produces energy to run the dry kilns.
The dry kilns are exempt manufacturing equipment used directly in the drying process of the lumber. The water system is used to ionize the water used in the boiler which in turn produces energy to run the dry kilns. In order to keep the water free from the buildup of deposits in the boiler tubes, the water treatment system uses six magnets attached to the outside of the pipes that create a magnetic field within the pipe. As the water passes through this magnetic field, it is ionized to prevent any deposit buildup inside the boiler tubes as it is being heated into steam. The Taxpayer takes the position that the water treatment system is a part of the manufacturing machinery and exempt from tax.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, 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).
Interpreting the above statutes, § B(2) of Virginia Regulation (VR) 630-10-63 provides:
-
- Items of tangible personal property which are used directly in manufacturing...are machinery, tools and repair parts therefor, fuel, 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. Convenient or facilitative items...or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing... (Emphasis added).
The Virginia Supreme Court, in the case of Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E. 2d 252 (1978), held that chemicals used in the maintenance of the taxpayer's boiler were taxable. VR 630-10-63 provides, in part, that tangible personal property used in maintenance of production machinery is taxable.
While I am cognizant of the fact that the present case does not involve boiler "chemicals," the water treatment system is used in an identical manner, i.e., the prevention of deposit buildup of exempt production machinery. It is the department's position that while the water treatment system is used to maintain proper operation of the boiler, it is not being used directly in the actual manufacturing process within the limitations set forth in the above statues and regulation. An item may be essential to the manufacturing operation and not be an immediate part of the actual production. See Public Documents P.D. 92-34 (4/23/92), 85-208 (10/31/85), and 88-129 (6/13/88) which further address the department's position with respect to this issue.
In this case, the water treatment system serves to facilitate the free flow of water to the boiler and is not an immediate part of the actual production process. Rather, the water treatment system is used in the maintenance of the boiler itself.
Based on longstanding established policy, l cannot agree with the Taxpayer that the water treatment system is used directly in manufacturing; therefore, the system does not qualify for the exemption provided under Code of Virginia § 58.1-609.3(2). Accordingly, there is no basis to revise the assessment.
The Taxpayer will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest. If you should have any questions, please contact ********, Office of Tax Policy,
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11845T
Rulings of the Tax Commissioner