Tax Type
Retail Sales and Use Tax
Description
List of Exemptions, Exceptions and Exclusions
Topic
Exemptions
Date Issued
10-26-1998
October 26, 1998
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you request a ruling on behalf of your client, the Taxpayer, regarding the sales and use tax exemption for manufacturing provided under Code of Virginia § 58.1-609.3(2).
FACTS
The Taxpayer is a Virginia manufacturer of various chemical-based products. The Taxpayer initiates one of its manufacturing processes by vaporizing one of its raw materials into a gaseous form. Once the raw material is vaporized, a catalyst is introduced into the product and the mixture is heated further. Once the mixture reaches a certain temperature, the heat breaks the compound down into two separate gases which are separated through a "scrubbing' process. One of the gases is transported through insulated piping to other manufacturing machinery for further processing and eventual incorporation into a finished product for resale. The other gas is diverted through similar piping to fuel a furnace that provides heat and steam to the manufacturing process. To prevent the gases from returning to liquid form, and in turn preventing a corresponding process failure or shutdown, the temperature of the gases must not drop below a certain level while traveling between manufacturing processes.
In order to maintain a consistently elevated process temperature and prevent the return of the gas to liquid, the Taxpayer coats it piping with heat-traced insulation. The insulation coats the piping throughout the manufacturing process and serves the dual function of retaining the heat emitted by the gas and also shields the piping from ambient temperatures that would cause the gases and pipes to cool below acceptable levels. This insulation is essential year-around for the continued efficient operation of the production process. The Taxpayer is requesting a ruling as to the sales and use tax application to the pipe insulation.
DETERMINATION
Code of Virginia § 58.1-609.3 (copy enclosed) provides an exemption from the sales and use tax for "machinery or tools or repairs parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing,... products for sale or resale.' Code of Virginia § 58.1-602 (copy enclosed) states that manufacturing and processing "includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site....'
Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) states that "used directly' refers to "those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration.' This regulation goes on to provide the following:
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- 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 even though such items may be directly attached to exempt production machinery.
- 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 even though such items may be directly attached to exempt production machinery.
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In the situation presented, it must be determined if the insulation in question is "used directly' in the manufacturing or processing operation. While I recognize that the piping may be exempt (when handling raw materials for further processing and eventual incorporation into the finished product) or taxable (when transporting gas to fuel a furnace), I cannot agree that any of the piping insulation qualifies for the manufacturing exemption. The insulation may serve an essential function to the overall process, but it is not used directly in the manufacturing process. An analogous situation was addressed in Public Document (P.D.) 89-327 (11/20/89), copy enclosed.
Based on all of the foregoing, the piping insulation at issue does not qualify for exemption, as it is not used directly in the manufacturing process. If you have any questions regarding this ruling, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16061K
Rulings of the Tax Commissioner