Tax Type
Retail Sales and Use Tax
Description
List of Exemptions, Exceptions and Exclusions
Topic
Exemptions
Date Issued
08-11-1998
Auguat 11, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you request correction of the retail sales and use tax audit liability of your client, ***** (the "Taxpayer'), for the period of January 1993 through December 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a commercial printing operation with two plants located in Virginia. The Taxpayer prints labels utilizing six multicolor rotogravure presses and also several offset presses. The Taxpayer is taking exception to the following areas held taxable in the retail sales and use tax audit: (i) Cylinder Department, (ii) Pre-Make Ready Department, (iii) Ink Department, (iv) Wash Up Department, (v) Rechrome Department, and (vi) Environmental Chamber. These issues will be discussed in detail in the Determination portion of this letter along with other miscellaneous issues raised in your letter.
DETERMINATION
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in ... manufacturing ... products for sale or resale.' The term "used directly' is defined in Code of Virginia Sec. 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).
Cylinder Department
This department is used for the storage and maintenance of printing cylinders between production runs. Prior to a production run, the printing cylinder needs to be etched in order for the printing ink to hold in the crevices. This function is outsourced to a third party. The Taxpayer then sends the cylinder to the Rechrome Department where the cylinder is chrome plated prior to being put in the production process. The Taxpayer is of the opinion that the storage racks and protective clothing used by personnel in the Cylinder Department provide for quality control of the product and, therefore, may be purchased exempt from the tax.
In the present case, the storage racks are used to store component parts of exempt machinery, i.e., printing cylinders. This department also performs minor maintenance on the cylinders, such as sanding abrasions and polishing. Although the cylinder storage racks are needed to protect the cylinders between production runs, the racks serve an indirect role in protecting the integrity of the product by protecting the printing cylinders before they are used on the production line. The same holds true for protective clothing and maintenance items used by personnel in the Cylinder Department. Accordingly, the functions of the storage racks and protective clothing are one step removed from the production process and are taxable.
Pre-Make Ready Department
The item at issue in this department is an overhead crane which is used to move cylinders into and out of press carriages. The Taxpayer feels that the crane used to perform this function is a direct and integral portion of the production function. The auditor held the crane in question taxable because it is used to transport exempt production machinery prior to production runs and at the completion of production runs. While the handling and storage of raw material which enters the production process is an exempt function as provided under VAC 10-210-920(B)(2), the handling and storage of exempt machinery or machinery parts does not enjoy this exemption (See P.D. 96-278 enclosed).
Ink Department
This department stores, handles and distributes all ink for the printing process. In order to meet customer's color specifications, the ink has to be properly measured in order to maintain a quality product. Based on the information you have provided, the ink and ink handling equipment held in the audit would be exempt as the handling of raw materials. These items will be removed from the audit.
Wash Up Department
This department cleans carriages, cylinders, blades and pans prior to each production run. Due to the nature of the Taxpayer's operation, all press parts must be thoroughly clean in order not to contaminate future production runs, i.e., ink color specifications required by customer. In accordance with Code of Virginia Sec. 58.1-602 cited above, "used directly' are "those activities which are an integral part of the production of a product... but not including... general maintenance...'. In addition, VAC 10-210-920.C provides that "operating supplies which are actively and continually consumed in the operation of exempt machinery and equipment, are deemed used directly in manufacturing or processing and are not subject to the tax.'
While the department recognizes that cleansing agents used during the production process by a printing company are exempt (these agents are generally referred to as "blanket wash'), cleansing agents used prior to or after a production run are considered general maintenance items and are not exempt. Therefore, I find the cleansing agents at issue here are not used during the actual production process and are therefore taxable.
Rechrome Department
The issue in this department is the taxing of a hood and ductwork used in the Taxpayer's Rechrome Department for the capture of solvent in the plant's solvent recovery system. Upon verification of certification of this equipment by the Department of Environmental Quality, these items will be removed from the audit findings.
Environmental Chamber
This is a room which was constructed in the Taxpayer's warehouse area and used to dry labels prior to delivery to customers. The Taxpayer claims that this area is attached to the building and became a part of the real estate upon installation. All taxes were paid on materials by the installing contractor.
According to the auditor, this item was not an issue at the time the audit was finalized, and the auditor did not inspect this structure. Upon inspection by the auditor to determine if this property is real property or tangible personal property, the auditor will determine if the Taxpayer is liable for tax on the purchase of the structure.
Other Issues -- Credits
Upon verification the tax was paid on an exempt baler, an exempt baler ejection door, and pallets used as packaging, I will agree to credit these taxes paid against the outstanding tax liability in this audit.
General Maintenance Supplies
The Taxpayer asserts that general maintenance supplies held taxable in the audit should be prorated based on supplies used directly in the manufacturing process and those used in general maintenance. The general maintenance supplies were assessed in accordance with the departmental policy set forth in the "Wash Up Department' section above. It should also be noted that, based on the information available at the time of the audit, the auditor identified maintenance items used directly in the production process and did not include such items in the audit findings. For this reason, I find no basis for prorating general maintenance supplies held taxable in the audit.
Based on the determination above, the audit will be revised accordingly. An auditor from the ***** District Office will contact the Taxpayer in order to review the additional information requested and make the appropriate revisions. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at
Sincerely,
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you request correction of the retail sales and use tax audit liability of your client, ***** (the "Taxpayer'), for the period of January 1993 through December 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a commercial printing operation with two plants located in Virginia. The Taxpayer prints labels utilizing six multicolor rotogravure presses and also several offset presses. The Taxpayer is taking exception to the following areas held taxable in the retail sales and use tax audit: (i) Cylinder Department, (ii) Pre-Make Ready Department, (iii) Ink Department, (iv) Wash Up Department, (v) Rechrome Department, and (vi) Environmental Chamber. These issues will be discussed in detail in the Determination portion of this letter along with other miscellaneous issues raised in your letter.
DETERMINATION
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in ... manufacturing ... products for sale or resale.' The term "used directly' is defined in Code of Virginia Sec. 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).
-
- Interpreting the above statutes, Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) [copy enclosed] provides for 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... 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 or processing ... (Emphasis added).
- 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... 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 or processing ... (Emphasis added).
Cylinder Department
This department is used for the storage and maintenance of printing cylinders between production runs. Prior to a production run, the printing cylinder needs to be etched in order for the printing ink to hold in the crevices. This function is outsourced to a third party. The Taxpayer then sends the cylinder to the Rechrome Department where the cylinder is chrome plated prior to being put in the production process. The Taxpayer is of the opinion that the storage racks and protective clothing used by personnel in the Cylinder Department provide for quality control of the product and, therefore, may be purchased exempt from the tax.
In the present case, the storage racks are used to store component parts of exempt machinery, i.e., printing cylinders. This department also performs minor maintenance on the cylinders, such as sanding abrasions and polishing. Although the cylinder storage racks are needed to protect the cylinders between production runs, the racks serve an indirect role in protecting the integrity of the product by protecting the printing cylinders before they are used on the production line. The same holds true for protective clothing and maintenance items used by personnel in the Cylinder Department. Accordingly, the functions of the storage racks and protective clothing are one step removed from the production process and are taxable.
Pre-Make Ready Department
The item at issue in this department is an overhead crane which is used to move cylinders into and out of press carriages. The Taxpayer feels that the crane used to perform this function is a direct and integral portion of the production function. The auditor held the crane in question taxable because it is used to transport exempt production machinery prior to production runs and at the completion of production runs. While the handling and storage of raw material which enters the production process is an exempt function as provided under VAC 10-210-920(B)(2), the handling and storage of exempt machinery or machinery parts does not enjoy this exemption (See P.D. 96-278 enclosed).
Ink Department
This department stores, handles and distributes all ink for the printing process. In order to meet customer's color specifications, the ink has to be properly measured in order to maintain a quality product. Based on the information you have provided, the ink and ink handling equipment held in the audit would be exempt as the handling of raw materials. These items will be removed from the audit.
Wash Up Department
This department cleans carriages, cylinders, blades and pans prior to each production run. Due to the nature of the Taxpayer's operation, all press parts must be thoroughly clean in order not to contaminate future production runs, i.e., ink color specifications required by customer. In accordance with Code of Virginia Sec. 58.1-602 cited above, "used directly' are "those activities which are an integral part of the production of a product... but not including... general maintenance...'. In addition, VAC 10-210-920.C provides that "operating supplies which are actively and continually consumed in the operation of exempt machinery and equipment, are deemed used directly in manufacturing or processing and are not subject to the tax.'
While the department recognizes that cleansing agents used during the production process by a printing company are exempt (these agents are generally referred to as "blanket wash'), cleansing agents used prior to or after a production run are considered general maintenance items and are not exempt. Therefore, I find the cleansing agents at issue here are not used during the actual production process and are therefore taxable.
Rechrome Department
The issue in this department is the taxing of a hood and ductwork used in the Taxpayer's Rechrome Department for the capture of solvent in the plant's solvent recovery system. Upon verification of certification of this equipment by the Department of Environmental Quality, these items will be removed from the audit findings.
Environmental Chamber
This is a room which was constructed in the Taxpayer's warehouse area and used to dry labels prior to delivery to customers. The Taxpayer claims that this area is attached to the building and became a part of the real estate upon installation. All taxes were paid on materials by the installing contractor.
According to the auditor, this item was not an issue at the time the audit was finalized, and the auditor did not inspect this structure. Upon inspection by the auditor to determine if this property is real property or tangible personal property, the auditor will determine if the Taxpayer is liable for tax on the purchase of the structure.
Other Issues -- Credits
Upon verification the tax was paid on an exempt baler, an exempt baler ejection door, and pallets used as packaging, I will agree to credit these taxes paid against the outstanding tax liability in this audit.
General Maintenance Supplies
The Taxpayer asserts that general maintenance supplies held taxable in the audit should be prorated based on supplies used directly in the manufacturing process and those used in general maintenance. The general maintenance supplies were assessed in accordance with the departmental policy set forth in the "Wash Up Department' section above. It should also be noted that, based on the information available at the time of the audit, the auditor identified maintenance items used directly in the production process and did not include such items in the audit findings. For this reason, I find no basis for prorating general maintenance supplies held taxable in the audit.
Based on the determination above, the audit will be revised accordingly. An auditor from the ***** District Office will contact the Taxpayer in order to review the additional information requested and make the appropriate revisions. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at
Sincerely,
Related Documents
Rulings of the Tax Commissioner