Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Dies used to manufacture packaging containers
Topic
Taxability of Persons and Transactions
Date Issued
01-17-1997
January 17, 1997
Re: § 58.1-1821: Retail Sales and Use Tax
Dear*********:
This will reply to your letter in which you seek correction of the sales and use tax audit of your client, *********** (the "Taxpayer"), for the period of May 1993 through April 1996.
FACTS
The Taxpayer is a manufacturer of packaging containers for resale to customers. In order to fulfill a customer's order, the Taxpayer must acquire dies in order to cut paperboard sheets and for printing labels and other information on the packaging material being produced. The Taxpayer itemizes the dies on the customer's invoice, but generally maintain possession of the dies since the customer would not have any use for them. The auditor assessed the dies as taxable sales to the Taxpayer's customers. The Taxpayer is taking exception to the taxing of the dies on two counts. First, the Taxpayer feels the dies are used directly in the manufacturing process and are therefore exempt. Second, the Taxpayer also argues that the dies become a component part of the exempt packaging materials sold.
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 therefore or replacement 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 § 581.-602 as "those activities which are an integral part of the production of a product,... but not including ancillary activities such as general maintenance and administration".
Based on the statute with regard to the "direct use" criteria for a manufacturer to enjoy the sales and use tax exemption, l am in full agreement that the dies in question are directly used in your manufacturing process, and are therefore exempt from the tax on their purchase.
This brings us to the question as to the tax application to the sale of the dies to the Taxpayer's customers. As stated in your letter, the packaging materials sold to the Taxpayer's customers are exempt in accordance with Virginia Regulation (VR) 630-10-26 (copy enclosed). Also stated in your letter, the Taxpayer itemizes the dies on the sales invoice to the customer and transfer of title to the dies passes to the customer, despite the fact the Taxpayer may maintain possession of the dies. Code of Virginia § 58.1-602 defines "sale" to mean "any transfer of title or possession, or both,... in any manner or by any means whatsoever, of tangible personal property...". (Emphasis added). Based on the reading of the statute, the transfer of title of the dies to the customer and the separate charge for the dies on the customer's invoice, clearly would qualify the dies as the sale of tangible personal property. Unfortunately, l cannot agree with the Taxpayer that the dies become a component part of the actual packaging material. The fact that the Taxpayer, in most cases, maintains possession of the dies further substantiates this position. This has been longstanding policy of the department as exhibited in P.D. 91-315 (12/30/91), copy enclosed.
Based on all of the above, l find no basis for revising the audit. If you should have any questions, please contact ********Office of Tax Policy, at***********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11502K
Rulings of the Tax Commissioner