Retail Sales and Use Tax
Manufacturing, processing, assembling, or refining; Exemptions
Taxability of Persons and Transactions
February 18, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
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 August 1993 through July 1996.
The Taxpayer is in the business of manufacturing automobile parts for a major automobile manufacturer (the "Customer"). It was mandated by the Customer that all parts manufactured by the Taxpayer contain a bar code label for inventory tracking at the Customer's plant site. All labels are applied at the end of the production run. Recently, the Taxpayer has begun using the bar code labels as a means of tracking their own inventory upon shipment. In cases where the parts are shipped in boxes, the labels are affixed to the outside of the boxes. In cases where the automobile parts are packed in returnable shipping containers, the labels are placed in bags at the end of the containers and are returned to the Taxpayer to be reused. The auditor assessed tax on the bar code labels as not used directly in the manufacturing process but for administrative purposes. The Taxpayer is taking exception to the taxing of the labels.
The Taxpayer was also taxed on a bridge crane used at the plant site. The bridge crane, while primarily used in the maintenance of production molds, is also used to change molds when changing the production runs. The Taxpayer is questioning the taxability of the bridge crane.
Code of Virginia § 58.1-609.3(2) provides an exemption from the retails sales and use tax for "industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product."
Virginia Regulation (VR) 630-10-63.C, copy enclosed, provides that activities involved in processing are divided into three separate categories, administration, production, and distribution. Subsection 1 of this regulation section provides for the following:
- "Administration" is the managerial, sales, and nonoperational aspects of manufacturing and processing operations and includes management, selling and marketing, employee comfort and convenience, and record keeping. Tangible personal property used in administration is subject to the tax. (Emphasis added).
Based on the information you have provided this office, a portion of the bar code labels become a component part of the manufactured product which is shipped to the Customer, and a portion are returned to the Taxpayer to be reused. Based on this understanding, and the statute and regulation cited above, l will agree to remove from the audit the portion of the labels that become a component part of the finished product. Upon verification of the exempt use by the auditor, the audit will be adjusted accordingly.
In regard to the bridge crane, Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery, tools, 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, including all steps of an integrated manufacturing... process, but not including ancillary activities such as general maintenance or administration." (Emphasis added).
VR 630-10-63 provides that the exemption applies to "machinery, tools, and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." (Emphasis added). Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
As provided in your letter, the bridge crane is used both in the maintenance of molds used in the manufacturing process and also used in changing molds in the production machinery when the Taxpayer changes production runs. Based on the above, maintenance of the molds is a taxable function which does not enjoy the sales and use tax exemption. While the changing of molds in the production machinery is an indispensable function which is essential to the manufacturing operation, l find that this function also is not an immediate part of the actual production process and therefore qualifies as a taxable function. For this reason, the department finds no basis for removing the bridge crane from the audit findings.
An auditor from our ******* District Office will contact you in order to make the necessary revisions. If you should have any questions, please contact *******Office of Tax Policy, at***********
Danny M. Payne