Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Production of cleaning agents and repackaging of bulk chemicals; Shipping containers
Topic
Taxability of Persons and Transactions
Date Issued
02-07-1997
February 7, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear*********************
This is in response to your letter of November 12, 1996 on behalf of an unidentified client (the "Taxpayer") regarding the sales and use tax exemptions available to industrial manufacturing and processing.
FACTS
The Taxpayer currently manufactures chemicals in Virginia and is entering into two new product lines. New product line "A" will involve the production of cleaning agents used by manufacturers of electronic components. When its new plant is operational, the Taxpayer will purchase chemicals, process those chemicals to make a cleaning agent, and transport the finished product in returnable containers to customers. The Taxpayer has already purchased these containers. Because the containers must be specially cleaned before use, they will be shipped to the Taxpayer's parent corporation outside the United States. The parent corporation currently has the equipment and expertise necessary for the cleaning process.
In addition to the specialized containers, the Taxpayer will also purchase (1 ) pumping, circulation, and filtration machinery to process the cleaning agent and (2) various analytical equipment to test raw materials and finished product. The finished product will be stored either in the specialized containers or in storage tanks.
New product line "B" will consist of chemicals and supplies which will be used primarily by research laboratories and industrial users. The Taxpayer will purchase the chemicals in bulk lots, perform tests to analyze purity and identify impurities, and then repackage the chemicals in smaller quantity lots for sale to customers.
You maintain that making the chemicals available in small quantities is essential to many customers who wish to avoid costly handling and disposal of excess chemicals. You further maintain that customers prefer the precise testing and analysis that the Taxpayer can provide and which is generally not available from bulk suppliers.
New product line "B" will also include certain products for research laboratories that will be purchased in bulk, processed into smaller parcels, then repackaged under the Taxpayer's name.
You suggest that the Taxpayer will be operating as an industrial manufacturer in respect to its new product lines and is not subject to the tax on purchases of containers, machinery, analytical equipment and repackaging equipment.
RULING
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, tools, and other items used directly in manufacturing or processing products for sale or resale. Virginia Regulation (VR) 630-10-63 provides that for a business to obtain the manufacturing or processing exemption, it must be (1) manufacturing or processing products for sale or resale, and (2) such production must be industrial in nature.
VR 630-10-63 further provides that:
-
- Industrial processors include establishments engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable. Products need not undergo a change in state or form in order for an establishment to be classified as an industrial processor.
With these provisions in mind, I will address each of the Taxpayer's new product lines.
New Product Line "A": As described in your correspondence, the production of cleaning agents for sale to other manufacturers qualifies as an industrial manufacturing activity. Accordingly, machinery and equipment used directly in this activity may be purchased by the Taxpayer exempt of the sales and use tax. Pursuant to Code of Virginia § 58.1-609.3(2), this exemption extends to "containers, ... drums or bags for future use for packaging tangible personal property for shipment or sale...." The specially coated containers purchased for shipping the Taxpayer's product to customers may therefore also be purchased exempt of the tax.
New Product Line "B": Analyzing, testing, and repackaging bulk chemicals into smaller quantities for customers is an exempt industrial processing activity, and the machinery, equipment, and supplies used directly in this industrial processing are exempt from the tax. I also find that the cutting and repackaging of supplies as described in your letter for resale to research laboratories is processing in the industrial sense.
Notwithstanding the above, the exemption applies only to those items used directly in an exempt manufacturing or processing activity. The concept of direct use is addressed in VR 630-10-63 which indicates that items which are used directly are those "which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process.
It is difficult to determine at this time whether the scales, lab benches, fume hoods, vent filters and storage cabinets mentioned in your letter meet this test for direct use. I would point out, for example, that tangible personal property used for ventilation is generally taxable. So too is tangible personal property used to dispose of plant wastes. In this regard, see the enclosed Public Documents 87-277 (12/23/87) and 93--135 (6/4/93). These determinations more fully address the application of the manufacturing and processing exemption as it applies to testing and ventilation equipment.
I trust that the above information addresses your concerns. Please contact ********* in my Office of Tax Policy at ********* if you need further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11853I
Rulings of the Tax Commissioner