Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Tally equipment and grinder used by lumber manufacturer
Topic
Taxability of Persons and Transactions
Date Issued
01-21-1997
January 21, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************:
This will reply to your letter in which you seek correction of the retail sales and use tax audit of ********* (the "Taxpayer") for the period August 1993 through June 1996.
FACTS
The Taxpayer is a lumber manufacturer. As a result of a recent sales and use tax audit, the Taxpayer was assessed tax on tally equipment used to measure lumber and print out tally sheets, and a grinder used in the Taxpayer's maintenance shop. The Taxpayer feels these items are used directly in the manufacturing process and are exempt from the retail sales and use tax.
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 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 § 58.1-602 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". (Emphasis added).
In interpreting the above statutory exemption, Virginia Regulation (VR) 630-10-63.C (copy enclosed) provides that the three major activities of a manufacturing and processing operation are "administration", "production", and "distribution". The regulation continues by defining what constitutes these activities. Subsection 1 of this regulation section describes administration activities and states "administration is the managerial, sales, and nonoperational aspects of manufacturing and processing and includes... record keeping." This section goes on to provide that tangible personal property used for customer billing, purchasing records, etc., are administrative items and are taxable.
Based on the information provided in your letter and by the auditor, the tallying equipment held taxable in the audit is used to measure board feet after the lumber comes off the production line and has been strapped and ready for shipment. The equipment provides print-outs of the number of board feet in each lot. It is apparent that this equipment is used in taxable administrative activities, i.e. inventory control, customer billing, etc., subsequent to the actual production process. For this reason, the department finds no basis for removing the tallying equipment from the audit. If the Taxpayer has any additional information to substantiate the exempt use of this equipment, the department will be glad to revisit this issue.
The grinder in question is used to sharpen and cut new teeth in band saw blades used directly in the milling of the lumber. The band saw blades come from the manufacturer ready to use. Extended use of the blades results in dulling of the blades or broken teeth on the blade. When this occurs, the blades are sent to the maintenance shop for sharpening or cutting new teeth in the blade. VR 630-10-63.C.2 addresses what constitutes taxable and exempt production activities and state "tangible personal property used in the repair, servicing, and maintenance of production machinery" is taxable. While the blade itself becomes part of production machinery and is exempt, the repair and servicing of the blade does not constitute an exempt activity as provided above. Hence, the grinder machine would be taxable.
If you should have any question, please contact ******* , Office of Tax Policy, at*********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11711K
Rulings of the Tax Commissioner