98-10 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax on construction material purchased and used at a sawmill

Topic

Manufacturing Exemption

Taxability of Persons and Transactions

Date Issued

01-20-1998

January 20, 1998

Dear*********:

In your letter of December 5, 1997, you seek correction of the sales and use tax assessment issued to (the Taxpayer) as a result of an audit.

FACTS

The Taxpayer operates a sawmill. An audit for the period October 1994 through September 1997 resulted in an assessment of (i) use tax on untaxed purchases used in its operations and (ii) sales tax on sales for which no tax was charged.

The Taxpayer takes exception to the use tax assessed on concrete and rebar used in the construction of ramps, roadways and a log sorting area. The Taxpayer also takes exception to the use tax assessed on materials used in the construction of its sawmill mezzanine. The Taxpayer maintains that these items are used directly in manufacturing products for sale and should therefore qualify for the industrial manufacturing exemption.

DETERMINATION

Code of Virginia Sec. 58.1-609.3(2)(iii) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in ... manufacturing ... products for sale or resale.' (Emphasis added.)

Code of Virginia Sec. 58.1-602 defines the term "used directly,' in relation to the above exemption, to mean "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 and administration.' Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) interprets both of the above statutes, stating the following:

- Items of tangible personal property which are used directly in manufacturing ... are machinery, tools and repair parts therefor, fuel, 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. Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing.... (Emphasis added.)

Accordingly, the fact that an item is essential to production is not sufficient grounds for exemption based on the Virginia Supreme Court's holding that "essential items which are not an immediate part of actual production are not exempt.' Webster Brick Company. Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978). Also, when there is any doubt as to whether an exemption applies, the department must adhere to the rule of strict construction of the statutory exemptions as established by the Virginia courts and deny the exemption. Based on these principles, 23 VAC 10-210-920(C)(2) specifically lists the following items as used indirectly in production and therefore taxable:

*Materials and apparatus used to support exempt production machinery, including flooring, concrete and metal platforms, etc., except supports or legs which are a component part of exempt production machinery and do not become affixed to realty;

*Tangible personal property used in the repair, servicing, and maintenance of production machinery;

*Catwalks, walkways, etc., regardless of whether used to provide access to production machinery for operation, maintenance or repair of such machinery;

*Materials used in constructing, paving or maintaining roadways on the plant site on which exempt production vehicles travel.

Log sorting area. As noted above, it is the longstanding policy of the department that flooring and roadway materials used at manufacturing plant sites are used indirectly in production. In this case, concrete and rebar have been used to pave a log sorting area and roadways and to construct loading and unloading ramps. The reinforced concrete pad constructed for the log sorting area provides an improved solid base for mobile equipment and vehicles to access, handle, sort and pile logs. The roadway materials and ramps also create a solid base to facilitate the conveyance of heavy logs at the plant site but do not actually convey the materials. Although these items may be used for essential purposes, I must conclude from the facts presented that the log sorting area, roadways and ramps only serve a limited role in the handling and storage of raw materials. Rather, they appear primarily used to facilitate production activities. For these reasons, I find that the concrete and rebar at issue are used indirectly in production.

Mezzanine. The department has consistently held that catwalks, mezzanines and other platforms or devices which provide convenient access to production machinery do not constitute an integral part of production.

In this case, the Taxpayer maintains that its mezzanine is part of the exempt sawing process as it allows by-products to fall away from the saw for easy collection on the floor under the mezzanine. I would note, however, that the mezzanine is not an exempt machine; rather, it constitutes a structural component which has become affixed to the realty. Moreover, I find no basis to conclude that the mezzanine is used directly in production.

Unfortunately, based on the foregoing, I find no basis for revising the assessment. If you have any questions about this determination, please contact ***** of my policy staff at *****.

Rulings of the Tax Commissioner