Tax Type
Retail Sales and Use Tax
Description
Deficiency assessment, manufacturer of materials which are used by other manufacturers
Topic
Collection of Delinquent Tax
Date Issued
08-05-1998
August 5, 1998
Re: § . 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you seek a correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period September 1995 through April 1997.
FACTS
The Taxpayer is a manufacturer of materials which are used by other manufacturers in the production of their products. The department's audit resulted in an assessment primarily for certain untaxed purchases. The Taxpayer protests the department's assessment of tax for lab equipment and supplies used in testing the properties of the Taxpayer's products for specific requirements. Also protested is the taxation of a pelletizer which is utilized in pelletizing the Taxpayer's off grade products. The Taxpayer contends that the foregoing equipment is used directly in the manufacturing process and should not be subjected to the tax.
DETERMINATION
Code of Virginia § . 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing ... products for sale or resale.' The term "used directly' is defined in § . 58.1-602 as "those activities which are an integral part of the production of a product ... but not including ancillary activities such as general maintenance or administration.'
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) interprets these statutes by providing that:
With this in mind, I will address each of the issues raised by the Taxpayer as follows:
Lab Equipment and Supplies: The Taxpayer produces polypropylene foam. The Taxpayer manufactures the original form of the product which is a hard plastic/vinyl. The hard material then undergoes a softening process, and after several stages of aging, during which quality control testing is accomplished, a foamlike material is produced. Upon completion of the production process, a sample of the foam is taken and aged for an additional seven to ten days after which supplementary lab tests are performed to determine if the foam possesses the desired specifications. The Taxpayer contends that while the physical process of production is complete, the product cannot be sold until the lab results verify that the product has achieved the proper physical properties.
The terms "manufacturing' and "processing' as defined by Code of Virginia § . 58.1-602 include "equipment and supplies used for production line testing and quality control.' (Emphasis added.) As the exemption is limited to production line testing, it has been the department's consistent treatment that the manufacturing exemption does not extend to equipment used in pre-production or post production quality control activities.
In this case, the production of the product is completed, and the product is placed on pallets, shrink wrapped or strapped and moved to the on-site warehouse for aging. It is a finished product ready for shipment dependent upon approval from a post production activity, the laboratory testing. Accordingly, the testing function is a step removed from the production process. As such, the laboratory equipment and supplies related to this particular area are not an immediate part of the actual production of the product and are not used in production line testing or quality control. Therefore, these items do not qualify for the manufacturing exemption.
Pelletizer: The Taxpayer states that the equipment at issue was originally intended to accomplish additional processing activities. In particular, foam products which do not meet exacting specifications and could not be sold to their intended purchaser would be pelletized for sale to markets requiring such a by-product. As the production of the foam was the first of its kind, start-up difficulty created a large amount of unsalable material because of specification requirements. As a result, the foam was pelletized and used as landfill. The Taxpayer contends that the machinery should be regarded as exempt manufacturing equipment because its intent was to utilize the machinery to process materials for sale or resale.
While the Taxpayer's intention was to utilize the equipment at issue in a production process, the Taxpayer exercised a first use of the equipment in a nonexempt activity, the pelletization of scrap materials and their subsequent use as waste for landfill. Consequently, the equipment, while intended for use in the manufacturing process, is not being used for that purpose. The foregoing sections of the Code of Virginia, and the supporting regulations established in Title 23 of the Virginia Administrative Code, clearly reflect that the exemption is extended to tangible personal property used directly in a manufacturing process. Equipment used to pelletize materials for purposes other than for sale or resale does not qualify for the manufacturing exemption.
Based on the foregoing, the department finds no basis for revising its audit. Accordingly, the balance of the assessment remains payable. The Taxpayer should return its payment for the balance of tax, interest and accrued interest totaling ***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days. If payment is not received within that time, interest will continue to accrue on the balance due. If you should have any questions regarding this matter, please contact. ***** of the department's Office of Tax Policy at*************
Sincerely,
Re: § . 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you seek a correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period September 1995 through April 1997.
FACTS
The Taxpayer is a manufacturer of materials which are used by other manufacturers in the production of their products. The department's audit resulted in an assessment primarily for certain untaxed purchases. The Taxpayer protests the department's assessment of tax for lab equipment and supplies used in testing the properties of the Taxpayer's products for specific requirements. Also protested is the taxation of a pelletizer which is utilized in pelletizing the Taxpayer's off grade products. The Taxpayer contends that the foregoing equipment is used directly in the manufacturing process and should not be subjected to the tax.
DETERMINATION
Code of Virginia § . 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing ... products for sale or resale.' The term "used directly' is defined in § . 58.1-602 as "those activities which are an integral part of the production of a product ... but not including ancillary activities such as general maintenance or administration.'
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) interprets these statutes by providing that:
-
- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor ... 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 ... or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing....
- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor ... 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 ... or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing....
With this in mind, I will address each of the issues raised by the Taxpayer as follows:
Lab Equipment and Supplies: The Taxpayer produces polypropylene foam. The Taxpayer manufactures the original form of the product which is a hard plastic/vinyl. The hard material then undergoes a softening process, and after several stages of aging, during which quality control testing is accomplished, a foamlike material is produced. Upon completion of the production process, a sample of the foam is taken and aged for an additional seven to ten days after which supplementary lab tests are performed to determine if the foam possesses the desired specifications. The Taxpayer contends that while the physical process of production is complete, the product cannot be sold until the lab results verify that the product has achieved the proper physical properties.
The terms "manufacturing' and "processing' as defined by Code of Virginia § . 58.1-602 include "equipment and supplies used for production line testing and quality control.' (Emphasis added.) As the exemption is limited to production line testing, it has been the department's consistent treatment that the manufacturing exemption does not extend to equipment used in pre-production or post production quality control activities.
In this case, the production of the product is completed, and the product is placed on pallets, shrink wrapped or strapped and moved to the on-site warehouse for aging. It is a finished product ready for shipment dependent upon approval from a post production activity, the laboratory testing. Accordingly, the testing function is a step removed from the production process. As such, the laboratory equipment and supplies related to this particular area are not an immediate part of the actual production of the product and are not used in production line testing or quality control. Therefore, these items do not qualify for the manufacturing exemption.
Pelletizer: The Taxpayer states that the equipment at issue was originally intended to accomplish additional processing activities. In particular, foam products which do not meet exacting specifications and could not be sold to their intended purchaser would be pelletized for sale to markets requiring such a by-product. As the production of the foam was the first of its kind, start-up difficulty created a large amount of unsalable material because of specification requirements. As a result, the foam was pelletized and used as landfill. The Taxpayer contends that the machinery should be regarded as exempt manufacturing equipment because its intent was to utilize the machinery to process materials for sale or resale.
While the Taxpayer's intention was to utilize the equipment at issue in a production process, the Taxpayer exercised a first use of the equipment in a nonexempt activity, the pelletization of scrap materials and their subsequent use as waste for landfill. Consequently, the equipment, while intended for use in the manufacturing process, is not being used for that purpose. The foregoing sections of the Code of Virginia, and the supporting regulations established in Title 23 of the Virginia Administrative Code, clearly reflect that the exemption is extended to tangible personal property used directly in a manufacturing process. Equipment used to pelletize materials for purposes other than for sale or resale does not qualify for the manufacturing exemption.
Based on the foregoing, the department finds no basis for revising its audit. Accordingly, the balance of the assessment remains payable. The Taxpayer should return its payment for the balance of tax, interest and accrued interest totaling ***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days. If payment is not received within that time, interest will continue to accrue on the balance due. If you should have any questions regarding this matter, please contact. ***** of the department's Office of Tax Policy at*************
Sincerely,
Rulings of the Tax Commissioner