Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Publishing equipment and supplies.
Topic
Taxability of Persons and Transactions
Date Issued
10-07-1997
October 7, 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 of March 1994 through August 1995.
FACTS
The Taxpayer is a manufacturer/publisher of subscription magazines, newsletters, and brochures. The Taxpayer was audited and assessed tax on machinery which is used to extract waste paper, by way of a vacuum system, from binding machinery. During the Taxpayer's binding process, the binding machinery will trim magazines, letters, and brochures, which results in a significant amount of waste paper. The binding machines have bins underneath in which the waste paper accumulates. The vacuum system pulls the waste paper from the bins to a hopper, where it is baled and sent to be recycled. The Taxpayer takes the position that the waste removal machinery is an integral part of the binding process and is crucial to the production function. The Taxpayer bases this position on the fact that if the waste paper retrieval bins are not emptied, the bins would back-up and cause the binding machinery to shut down.
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 therefor or replacement parts thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale." (Emphasis added). Code of Virginia § 58.1-602 defines "used directly" as, "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance and administration".
While the department realizes that the waste paper removal system may serve the essential function of removing waste paper from the bins located under the exempt binding equipment, I cannot agree that this system is directly used in the production of the Taxpayers manufactured products. The courts have long established that the statutory exemptions from the retail sales and use tax are to be strictly construed. As a result, I find the equipment in question does not meet the exemption requirement set forth under Code of Virginia § 58.1-609.3(2). I have also enclosed P.D. 90-54 which addresses a similar situation and further upholds the departments position.
If you should have any questions, please contact ******** , Office of Tax Policy, at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12414K
Rulings of the Tax Commissioner