Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Packaging; Pallets and dust collector.
Topic
Taxability of Persons and Transactions
Date Issued
03-11-1998
March 11, 1998
Dear**********:
This will reply to your letter in which you seek correction of the retail sales and use tax audit of your client, ***** (the "Taxpayer'), for the period of March 1994 through February 1997.
FACTS
The Taxpayer is a manufacturer of concrete block and masonry products, including industrial and lightweight aggregate products. A recent sales and use tax audit produced an outstanding tax liability for a Cement Powder Dust Collector System and pallets used to ship finished product to the Taxpayers customers. A brief description of the contested areas are set forth below.
Cement Powder Dust Collector System
The Cement Powder Dust Collector System serves basically three functions: i) collection of cement dust in the production area to prevent contamination of the combination container where raw materials are combined and used for color pigmentation in the production of other products; ii) reclamation of cement dust for recycling and reuse in subsequent production runs; and iii) ventilation of the production area to prevent employees from inhaling cement dust and improve visibility in the production area. The Taxpayer takes the position that the Cement Powder Dust Collector System is primarily used in a production function and exempt from the tax.
Pallets
The Taxpayer purchases pallets which are used to ship finished product to customers. Once the concrete product is completed and cured in a kiln, the product is moved down an assembly line to a shrink-wrap packaging machine. Here the product is placed on wooden pallets and a shrink-wrap bag is placed over the product. The bag is shrink-wrapped around the product and often times partially attached to the base of the pallets. The auditor assessed tax on the pallets as being purchased by the Taxpayer for their own use and consumption in their shipping function. The Taxpayer takes the position that the pallets constitutes packaging exempt from taxation under Code of Virginia Sec. 58.1-609.3(2)(iv) and VAC 10-210-920, Manufacturing and processing.
DETERMINATION
For the sake of simplicity, I will address each of the above issues separately below.
Cement Powder Dust Collector System
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 . . . or supplies used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale.' In addition, Code of Virginia Sec. 58.1-602 defines the term "used directly' as referring "to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process.' The question in this case is whether the Taxpayers Cement Powder Dust Collector System qualifies for the exemption based on the varied uses of the equipment as described above.
As provided in the Facts section of this letter, the equipment in question serves three separate functions. Based on a similar analysis, the reclamation activity and ventilation activity does not qualify for exemption. This leads to the question of whether or not the "quality control' exemption set forth in VAC 10-210-920.C(2) would be applicable to the equipment based on its use in removing dust from the air which would contaminate the color pigmentation mixing process which occurs during the actual production of the block.
The terms "manufacturing' and "processing' as defined by Code of Virginia Sec. 58.1-602 includes "equipment and supplies used for production line testing and quality control.' VAC 10-210-920.C(2) provides that "equipment used for production line testing or quality control is classified as exempt production equipment.' Based on the exemption set forth in this regulation, this function of the equipment would qualify for the exemption.
In this case, the Cement Powder Dust Collector System serves both a taxable function and an exempt function. VAC 10-210-920.D addresses machinery and equipment used in both taxable and exempt functions and provides that the department will look to the preponderance of use in order to determine whether the equipment is taxable or exempt. In the present case, and based on the nature of the functions performed by the Cement Powder Dust Collector System, it is difficult to assign a percentage of time the System is used in an exempt function as opposed to taxable functions. As preponderance of use percentages cannot be established, l will agree to prorate the Cement Powder Dust Collector System at 50% taxable and 50% exempt.
Pallets
VAC 10-210-400 addresses containers, packaging materials, and equipment and defines "transportation devices' to mean "items which are used to transport and protect products to sale and to restrain product movement in a single plane of direction. Examples of such items are pallets, dunnage, strapping and similar materials used to brace or secure cargo for transport.' This regulation goes on to provide that "transportation devices' are not packaging materials and may not be purchased tax exempt unless purchased for resale.
An exception to this general rule is provided in VAC 10-210-920. This regulation notes that the tax does not apply to "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable),' when used or consumed by an industrial manufacturer or processor of products for sale or resale.
The Virginia Supreme Court, in Webster Brick Company v. Department of Taxation, 219 Va. 81, 245 S.E.2nd 252 (1978), held that the packaging exemption above was limited to items actually used in "packaging' products. The Court defined "packaging' as "putting into a protective wrapper or container for shipment or storage.' In its opinion, the Court also referenced an Ohio Supreme Court opinion, Custom Beverage Packers, Inc. v. Kosydar, 33 Ohio St.2d 68, 294 N.E.2d. 672 (1973), which held that unbound pallets restrained movement in only on direction and were not "packages' within the meaning of that state's sales and use tax exemption.
Under Virginia law, pallets generally do not qualify as "packaging' materials and are therefore subject to the tax when used by the Taxpayer to transport its products to its sales facility. However, the department has traditionally held that pallets qualify as "packaging' materials if the pallets are bound (such as by shrink-wrapping) to the items they carry so as to restrain product movement in more than a single plane of direction and if the packaging activity occurs at the manufacturing plant site. Such pallets and boards used to repair them would then qualify for the exemption. Pallet and their repair parts for use at a general distribution facility would however be subject to the tax.
Based on the facts presented in your letter, and the photographs provided showing properly and improperly applied shrink-wrap, it is apparent that the intent of the shrink-wrapping process is to attach the Taxpayer's product to the pallet. The departments policy with respect to shrink-wrap and pallets qualifying as "packaging' does not stipulate that all four corners of the pallet must be bound. This being the case, I find that the pallets used by the Taxpayer to ship their product would qualify for the exemption extended to manufacturers set forth above.
An auditor from our ***** District Office will contact the Taxpayer in order to make the necessary revisions. If you should have any question, please contact *****, Office of Tax Policy, at *****.
Dear**********:
This will reply to your letter in which you seek correction of the retail sales and use tax audit of your client, ***** (the "Taxpayer'), for the period of March 1994 through February 1997.
FACTS
The Taxpayer is a manufacturer of concrete block and masonry products, including industrial and lightweight aggregate products. A recent sales and use tax audit produced an outstanding tax liability for a Cement Powder Dust Collector System and pallets used to ship finished product to the Taxpayers customers. A brief description of the contested areas are set forth below.
Cement Powder Dust Collector System
The Cement Powder Dust Collector System serves basically three functions: i) collection of cement dust in the production area to prevent contamination of the combination container where raw materials are combined and used for color pigmentation in the production of other products; ii) reclamation of cement dust for recycling and reuse in subsequent production runs; and iii) ventilation of the production area to prevent employees from inhaling cement dust and improve visibility in the production area. The Taxpayer takes the position that the Cement Powder Dust Collector System is primarily used in a production function and exempt from the tax.
Pallets
The Taxpayer purchases pallets which are used to ship finished product to customers. Once the concrete product is completed and cured in a kiln, the product is moved down an assembly line to a shrink-wrap packaging machine. Here the product is placed on wooden pallets and a shrink-wrap bag is placed over the product. The bag is shrink-wrapped around the product and often times partially attached to the base of the pallets. The auditor assessed tax on the pallets as being purchased by the Taxpayer for their own use and consumption in their shipping function. The Taxpayer takes the position that the pallets constitutes packaging exempt from taxation under Code of Virginia Sec. 58.1-609.3(2)(iv) and VAC 10-210-920, Manufacturing and processing.
DETERMINATION
For the sake of simplicity, I will address each of the above issues separately below.
Cement Powder Dust Collector System
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 . . . or supplies used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale.' In addition, Code of Virginia Sec. 58.1-602 defines the term "used directly' as referring "to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process.' The question in this case is whether the Taxpayers Cement Powder Dust Collector System qualifies for the exemption based on the varied uses of the equipment as described above.
As provided in the Facts section of this letter, the equipment in question serves three separate functions. Based on a similar analysis, the reclamation activity and ventilation activity does not qualify for exemption. This leads to the question of whether or not the "quality control' exemption set forth in VAC 10-210-920.C(2) would be applicable to the equipment based on its use in removing dust from the air which would contaminate the color pigmentation mixing process which occurs during the actual production of the block.
The terms "manufacturing' and "processing' as defined by Code of Virginia Sec. 58.1-602 includes "equipment and supplies used for production line testing and quality control.' VAC 10-210-920.C(2) provides that "equipment used for production line testing or quality control is classified as exempt production equipment.' Based on the exemption set forth in this regulation, this function of the equipment would qualify for the exemption.
In this case, the Cement Powder Dust Collector System serves both a taxable function and an exempt function. VAC 10-210-920.D addresses machinery and equipment used in both taxable and exempt functions and provides that the department will look to the preponderance of use in order to determine whether the equipment is taxable or exempt. In the present case, and based on the nature of the functions performed by the Cement Powder Dust Collector System, it is difficult to assign a percentage of time the System is used in an exempt function as opposed to taxable functions. As preponderance of use percentages cannot be established, l will agree to prorate the Cement Powder Dust Collector System at 50% taxable and 50% exempt.
Pallets
VAC 10-210-400 addresses containers, packaging materials, and equipment and defines "transportation devices' to mean "items which are used to transport and protect products to sale and to restrain product movement in a single plane of direction. Examples of such items are pallets, dunnage, strapping and similar materials used to brace or secure cargo for transport.' This regulation goes on to provide that "transportation devices' are not packaging materials and may not be purchased tax exempt unless purchased for resale.
An exception to this general rule is provided in VAC 10-210-920. This regulation notes that the tax does not apply to "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable),' when used or consumed by an industrial manufacturer or processor of products for sale or resale.
The Virginia Supreme Court, in Webster Brick Company v. Department of Taxation, 219 Va. 81, 245 S.E.2nd 252 (1978), held that the packaging exemption above was limited to items actually used in "packaging' products. The Court defined "packaging' as "putting into a protective wrapper or container for shipment or storage.' In its opinion, the Court also referenced an Ohio Supreme Court opinion, Custom Beverage Packers, Inc. v. Kosydar, 33 Ohio St.2d 68, 294 N.E.2d. 672 (1973), which held that unbound pallets restrained movement in only on direction and were not "packages' within the meaning of that state's sales and use tax exemption.
Under Virginia law, pallets generally do not qualify as "packaging' materials and are therefore subject to the tax when used by the Taxpayer to transport its products to its sales facility. However, the department has traditionally held that pallets qualify as "packaging' materials if the pallets are bound (such as by shrink-wrapping) to the items they carry so as to restrain product movement in more than a single plane of direction and if the packaging activity occurs at the manufacturing plant site. Such pallets and boards used to repair them would then qualify for the exemption. Pallet and their repair parts for use at a general distribution facility would however be subject to the tax.
Based on the facts presented in your letter, and the photographs provided showing properly and improperly applied shrink-wrap, it is apparent that the intent of the shrink-wrapping process is to attach the Taxpayer's product to the pallet. The departments policy with respect to shrink-wrap and pallets qualifying as "packaging' does not stipulate that all four corners of the pallet must be bound. This being the case, I find that the pallets used by the Taxpayer to ship their product would qualify for the exemption extended to manufacturers set forth above.
An auditor from our ***** District Office will contact the Taxpayer in order to make the necessary revisions. If you should have any question, please contact *****, Office of Tax Policy, at *****.
Rulings of the Tax Commissioner