Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Industrial materials, machinery/ supplies.
Topic
Taxability of Persons and Transactions
Date Issued
06-08-1998
June 8, 1998
Dear****:
This is in reply to your letter of October 23, 1997, to ***** of the department's *****. In your letter, you protest the retail sales and use tax assessment issued to (the "Taxpayer') for the period April 1996 to June 1997. I apologize for the department's delay in responding to your appeal.
FACTS
The Taxpayer designs and manufactures components of a cleanroom, including air handlers, ceiling and wall systems, raised access flooring, and mini-environments, for semiconductor manufacturing facilities. The Taxpayer was awarded a contract to design, fabricate, install, and test a completed cleanroom for a semiconductor manufacturing facility in Virginia. An audit of the Taxpayer revealed that tax was not paid on any of its purchases used in the performance of the contract. You contend that certain purchases should not be subject to the sales and use tax because they are used directly in manufacturing and, therefore, qualify for exemption pursuant to Code of Virginia § 58.1-609.3(2)(iii).
I understand that the issues related to consumable supplies have been resolved. The remaining issues to be addressed are: (1) cleanroom component systems (zone walls, ceiling systems, flooring systems, and air-filtration gel); and (2) miscellaneous items.
DETERMINATION
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.'
Title 23 of the Virginia Administrative Code ( VAC) 10-210-920 explains that the exemption applies to
"machinery, tools, and repair parts therefor, 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.' Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
In addition, Code of Virginia Sec. 58.1-602 includes equipment and supplies used directly in production line quality control within the scope of the manufacturing exemption.
Cleanroom component systems
In Public Document (P.D.) 95-129 (copy enclosed), the department addressed the application of the manufacturing exemption to cleanroom component systems, including walls or partitions, flooring, and ceiling systems. The department ruled that these components serve a quality control function by creating a sterile environment which is critical to guaranteeing the integrity of the manufactured product (semiconductors). Therefore, cleanroom component systems qualify for the manufacturing exemption. Items used in a manner consistent with those outlined in P.D. 95-129 will be removed from the audit.
The Taxpayer states that the cleanroom air-filtration gel is integral to the air filtration system and should be exempt from the tax. While the air filtration system may qualify for the manufacturing exemption, it is not clear from the Taxpayer's letter what role the air-filtration gel plays in the manufacturing process. If the gel is used to maintain the air filtration system, it does not qualify for the manufacturing exemption because general maintenance items are taxable. On the other hand, if the gel serves a production line quality control function, it may qualify for exemption. Because the exact nature of this item is not known, l am referring this matter to the auditor for further review.
Miscellaneous items
The auditor also assessed tax on purchases of other miscellaneous items. You indicate that further research is necessary because the descriptions in the audit report are incomplete. You believe a reasonable approach would be to tax up to one-half of the measure for these items.
I am instructing the auditor to review the miscellaneous items you question at the same time he reviews the use of the air-filtration gel. A more complete description will be provided and you will have the opportunity to discuss the exact use of these items. The auditor will then determine if the manufacturing exemption is applicable. If any issues remain after the auditor has made his determination, the Taxpayer may file another appeal. An auditor from the department's *****************unit will contact you within the next two weeks to arrange a mutually agreeable time to review the items at issue.
If you have any questions regarding this matter, you may contact ***** of the department's Office of Tax Policy at *****.
Dear****:
This is in reply to your letter of October 23, 1997, to ***** of the department's *****. In your letter, you protest the retail sales and use tax assessment issued to (the "Taxpayer') for the period April 1996 to June 1997. I apologize for the department's delay in responding to your appeal.
FACTS
The Taxpayer designs and manufactures components of a cleanroom, including air handlers, ceiling and wall systems, raised access flooring, and mini-environments, for semiconductor manufacturing facilities. The Taxpayer was awarded a contract to design, fabricate, install, and test a completed cleanroom for a semiconductor manufacturing facility in Virginia. An audit of the Taxpayer revealed that tax was not paid on any of its purchases used in the performance of the contract. You contend that certain purchases should not be subject to the sales and use tax because they are used directly in manufacturing and, therefore, qualify for exemption pursuant to Code of Virginia § 58.1-609.3(2)(iii).
I understand that the issues related to consumable supplies have been resolved. The remaining issues to be addressed are: (1) cleanroom component systems (zone walls, ceiling systems, flooring systems, and air-filtration gel); and (2) miscellaneous items.
DETERMINATION
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.'
Title 23 of the Virginia Administrative Code ( VAC) 10-210-920 explains that the exemption applies to
"machinery, tools, and repair parts therefor, 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.' Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
In addition, Code of Virginia Sec. 58.1-602 includes equipment and supplies used directly in production line quality control within the scope of the manufacturing exemption.
Cleanroom component systems
In Public Document (P.D.) 95-129 (copy enclosed), the department addressed the application of the manufacturing exemption to cleanroom component systems, including walls or partitions, flooring, and ceiling systems. The department ruled that these components serve a quality control function by creating a sterile environment which is critical to guaranteeing the integrity of the manufactured product (semiconductors). Therefore, cleanroom component systems qualify for the manufacturing exemption. Items used in a manner consistent with those outlined in P.D. 95-129 will be removed from the audit.
The Taxpayer states that the cleanroom air-filtration gel is integral to the air filtration system and should be exempt from the tax. While the air filtration system may qualify for the manufacturing exemption, it is not clear from the Taxpayer's letter what role the air-filtration gel plays in the manufacturing process. If the gel is used to maintain the air filtration system, it does not qualify for the manufacturing exemption because general maintenance items are taxable. On the other hand, if the gel serves a production line quality control function, it may qualify for exemption. Because the exact nature of this item is not known, l am referring this matter to the auditor for further review.
Miscellaneous items
The auditor also assessed tax on purchases of other miscellaneous items. You indicate that further research is necessary because the descriptions in the audit report are incomplete. You believe a reasonable approach would be to tax up to one-half of the measure for these items.
I am instructing the auditor to review the miscellaneous items you question at the same time he reviews the use of the air-filtration gel. A more complete description will be provided and you will have the opportunity to discuss the exact use of these items. The auditor will then determine if the manufacturing exemption is applicable. If any issues remain after the auditor has made his determination, the Taxpayer may file another appeal. An auditor from the department's *****************unit will contact you within the next two weeks to arrange a mutually agreeable time to review the items at issue.
If you have any questions regarding this matter, you may contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner