Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Purchases for maintenance purposes
Topic
Taxability of Persons and Transactions
Date Issued
10-03-1997
October 3, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in response to your letter seeking correction of a sales and use tax assessments issued to *******(the "Taxpayer") for the period April 1994 to December 1996. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a tire manufacturer. Following an audit by the department, an assessment was issued to the Taxpayer for failure to pay use tax on the purchase of equipment and/or repair parts for tire mold forklifts used in its manufacturing facility. The Taxpayer protests the assessment and also requests guidance on the availability of an exemption for purchases of mold cleaning equipment and supplies.
DETERMINATION
Each of the issues raised by the taxpayer will be addressed separately as follows:
Mold Forklifts
Tire molds are used to cure the tread and sidewall imprints in the tire presses. The molds themselves are exempt machinery used directly in the manufacturing process. When the molds become contaminated with tire residue or the press needs to be set up to run a different size tire, the mold must be changed. Because of the size and weight of the molds, removal from the tire press is accomplished with a specialized forklift.
Code of Virginia § 58.1-609.3(2) provides an exemption from the tax for machines and tools used directly in manufacturing products for sale or resale. Code of Virginia § 58.1-602 defines "used directly" to include "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process...". The applicable sales tax regulation, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 (2), explains that an exemption is available for "subprocessing activities which produce tangible personal property used directly in the main manufacturing or processing activity."
In a 1974 ruling, the department applied the integrated manufacturing process concept to determine that the boom or crane used to move the RTS drum within the tire manufacturing area was exempt machinery used directly in the manufacturing process. The Taxpayer asserts that the purchases for the forklifts should be exempt based on this earlier ruling.
Based on the information provided, the use of the forklift to change tire molds is distinguishable from the use of the crane described above. The crane is used to move the drum for each tire that is moving through the manufacturing process. It is thus continually and directly used on the manufacturing line in the manufacturing process. The use of the forklifts is not continuous or directly part of the manufacturing process. As stated in your letter, the changes occur, on average, every 30 days. During this 30 day period, a large number of tires are produced from the mold without any intervention of the mold changing forklift.
From the foregoing, it is clear that the forklifts have no direct role in the manufacturing process. When the forklifts are used to change the molds, this use is in the nature of a maintenance procedure rather than a step in the manufacturing process. Purchases of equipment used or consumed in the maintenance of equipment directly used in a manufacturing process are not exempt from the tax. See P.D.'s 96-327 (11/12/96) and 96-36 (4/3/96) copies enclosed. Therefore, the portion of the audit relating to the equipment/repair parts purchased for the tire mold forklifts is correct as assessed.
Cleaning Process for Tire Molds
The molds become contaminated with tire deposits after approximately 30 days of production and must be removed and replaced with cleaned molds. The cleaning process requires a number of steps undertaken by an employee specially trained to perform this work.
After the mold is removed from the tire press it is transported with the mold forklift to a separate area for disassembly. Depending on the size of the mold, there may be as many as one hundred separate parts. The mold parts are cleaned by what is often referred to as a "bead blaster" which cleans with tiny glass beads driven by high pressure air or water depending on the type of mold involved. After this cleaning process is completed, the vent holes which are designed to allow air to escape from the mold are drilled out to remove any remaining tire deposits. The molds are then given a second cleaning with a blast of high pressure air, reassembled and coated with a protective layer of grease and stored until they are reinstalled on the tire press.
You have requested a ruling as to whether the cleaning process applied to the tire molds described above is considered an exempt subprocessing activity. To support your position that the process should qualify for the manufacturing exemption, you cite P.D. 94-28 (3/2/94). This earlier ruling involved a plastics manufacturer which employed special tubes for molding an extruded plastic product. After each production run, typically two to three times a day, the tubes required a thorough cleaning to remove plastic accumulations inside the tube. Initial cleaning was performed with a sandblaster. The tubes were then baked to remove any remaining traces of plastic and recoated with a layer of Teflon paint. In P.D. 94-28, the department ruled that the recoating of the tubes went beyond the general maintenance of tubes and qualified as a subprocessing activity.
Title 23 VAC 10-210-920 B. provides that tangible personal property used in maintenance of production machinery is taxable. Based on the fact that the mold cleaning process is not in active and continuous use on the production line, and is clearly used in the maintenance of production line parts, l find no basis for ruling that the items used in this maintenance process are exempt from the tax. It is the department's position that the maintenance in the present case does not rise to the level of a subprocessing activity. I have enclosed P.D. 92-139 which upholds this position and is on-point with the issues contained herein.
As I have determined above, the mold forklift is considered taxable maintenance equipment. Purchases of equipment and repair parts for these specialized fork lifts are, therefore, not exempt from the tax. An updated bill will be issued to you immediately. No additional interest will accrue provided the assessment is paid within 60 days.
If you have any questions regarding this letter, please contact ****in my Office of Tax Policy at*****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12513D
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Rulings of the Tax Commissioner