Tax Type
Retail Sales and Use Tax
Description
Manufacturing industrial materials, machinery, and supplies; Sanitizing chemicals
Topic
Manufacturing
Taxability of Persons and Transactions
Date Issued
04-29-1998
April 29, 1998
Dear*********:
This will reply to your letter in which you seek correction of sales and use tax assessments issued to ***** (the Taxpayer) for the period November 1993 through October 1996. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a wholesale food distributor and also has a dairy processing operation. At issue is the tax assessed to chemicals used to sanitize dairy equipment at the Taxpayer's dairy processing operation. The Taxpayer maintains that the chemicals qualify for the manufacturing and processing exemption. The Taxpayer also takes exception to the inclusion of advertising supplies in the calculation of the use tax compliance ratio. Lastly, the Taxpayer requests removal of the penalty assessed.
DETERMINATION
Sanitation Chemicals
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, equipment, supplies, etc. 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.'
Title 23 of The Virginia Administrative Code (VAC) 10-210-920(B)(2) further defines the term "used directly' noting that "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.' This section continues, "integrated manufacturing includes the production line of a plant . . . starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished . . . and conveyed to a warehouse at the plant site. . . .' Subsection C.2 of this regulation provides that equipment used for production line testing and quality control is exempt from taxation. The department has interpreted this regulation to only include that equipment which is "used directly' in the quality control function on the production line of the plant site during the manufacturing process.
The Taxpayer uses the chemicals XY-12 and Oxonia Active to sanitize the production equipment on a daily basis in order to prevent the formation of bacteria on such equipment and to protect the integrity of the dairy products. It is my understanding that the chemicals are also used to sanitize tanker trucks after each delivery of dairy products and to sanitize the dairy crates each time they are returned from the stores.
Based on the facts presented, the chemicals in this case are analogous to those discussed in Public Document P.D. 97-134 (3/20/97). In that case, sanitizing chemicals used in a milk processing plant were an indispensable part of the quality control of the manufacturing process and not subject to sales tax. However, chemicals used to sanitize tanker trucks being used to transport raw materials to the plant site were held taxable.
In this case, because inadequate sanitary conditions would result in the contamination of the product, the chemicals are an indispensable part of the quality control process. Accordingly, the assessment will be revised to remove these chemicals used in the sanitization of production machinery. The chemicals used in the sanitation of the tanker trucks and dairy crates are not being used directly in the actual manufacturing process within the limitations set forth in the above statutes and regulation and are taxable.
Advertising Services
The Taxpayer provides advertising services to its member stores. In this case, the Taxpayer did not pay the use tax on the purchase of prepress and printing supplies but instead charged the sales tax on the advertising services it provided to the member stores. The Taxpayer maintains that while this practice was in effect during the prior audits, the sale of advertising services were not taxed. For this reason, the Taxpayer requests that the purchases relating to advertising services be excluded from the calculation of the compliance ratio.
In the enclosed Title 23 VAC 10-210-41(B), specific guidance is given to advertising businesses on the purchase of tangible personal property and provides, in part, "[A]dvertising businesses are engaged in providing professional services and are the users and consumers of all tangible personal property purchases for use in such businesses. Therefore, the tax applies to all purchases by an advertising business. . . .'
A review of the prior audit reveals that the issue of whether the Taxpayer was providing advertising services or selling tangible personal property was raised. Although the items sold were being used in an advertising capacity, the Taxpayer was not acting as an advertising business. The auditor therefore determined that the Taxpayer's purchase of various materials and supplies to produce generic signs and banners sold to member grocery stores was a sale of tangible personal property and not an exempt advertising service. While the Taxpayer's purchases in the current audit are used in connection with providing exempt advertising services, based on the prior audit, it is appropriate to treat the inclusion of the advertising purchases as a new issue insofar as the Taxpayer is concerned. Therefore, advertising purchases will be removed from the calculation of the use tax compliance ratio.
Penalty
The auditor assessed the penalty in accordance with the Taxpayer's compliance ratios. As this was the fourth generation audit, the Taxpayer was required to meet an 85% compliance ratio for both sales and use tax. The Taxpayer met and exceeded the sales ratio requirement at 100%, but failed to meet the use tax requirement with a ratio of 82%.
Subsequent to any audit revisions necessary, the use tax compliance ratio will be recomputed. Once a new compliance ratio has been established, the penalty will be reevaluated in accordance with the above tolerances.
Summary
The audit will be returned to the********* District Office for revisions in accordance with this determination. The auditor will contact the Taxpayer to resolve the issue of chemical sales. Because the Taxpayer has paid the assessment in full, a refund will be issued based upon revisions to the assessment.
If you have any questions, please contact ***** in the Office of Tax Policy at *****.
Dear*********:
This will reply to your letter in which you seek correction of sales and use tax assessments issued to ***** (the Taxpayer) for the period November 1993 through October 1996. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a wholesale food distributor and also has a dairy processing operation. At issue is the tax assessed to chemicals used to sanitize dairy equipment at the Taxpayer's dairy processing operation. The Taxpayer maintains that the chemicals qualify for the manufacturing and processing exemption. The Taxpayer also takes exception to the inclusion of advertising supplies in the calculation of the use tax compliance ratio. Lastly, the Taxpayer requests removal of the penalty assessed.
DETERMINATION
Sanitation Chemicals
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, equipment, supplies, etc. 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.'
Title 23 of The Virginia Administrative Code (VAC) 10-210-920(B)(2) further defines the term "used directly' noting that "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.' This section continues, "integrated manufacturing includes the production line of a plant . . . starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished . . . and conveyed to a warehouse at the plant site. . . .' Subsection C.2 of this regulation provides that equipment used for production line testing and quality control is exempt from taxation. The department has interpreted this regulation to only include that equipment which is "used directly' in the quality control function on the production line of the plant site during the manufacturing process.
The Taxpayer uses the chemicals XY-12 and Oxonia Active to sanitize the production equipment on a daily basis in order to prevent the formation of bacteria on such equipment and to protect the integrity of the dairy products. It is my understanding that the chemicals are also used to sanitize tanker trucks after each delivery of dairy products and to sanitize the dairy crates each time they are returned from the stores.
Based on the facts presented, the chemicals in this case are analogous to those discussed in Public Document P.D. 97-134 (3/20/97). In that case, sanitizing chemicals used in a milk processing plant were an indispensable part of the quality control of the manufacturing process and not subject to sales tax. However, chemicals used to sanitize tanker trucks being used to transport raw materials to the plant site were held taxable.
In this case, because inadequate sanitary conditions would result in the contamination of the product, the chemicals are an indispensable part of the quality control process. Accordingly, the assessment will be revised to remove these chemicals used in the sanitization of production machinery. The chemicals used in the sanitation of the tanker trucks and dairy crates are not being used directly in the actual manufacturing process within the limitations set forth in the above statutes and regulation and are taxable.
Advertising Services
The Taxpayer provides advertising services to its member stores. In this case, the Taxpayer did not pay the use tax on the purchase of prepress and printing supplies but instead charged the sales tax on the advertising services it provided to the member stores. The Taxpayer maintains that while this practice was in effect during the prior audits, the sale of advertising services were not taxed. For this reason, the Taxpayer requests that the purchases relating to advertising services be excluded from the calculation of the compliance ratio.
In the enclosed Title 23 VAC 10-210-41(B), specific guidance is given to advertising businesses on the purchase of tangible personal property and provides, in part, "[A]dvertising businesses are engaged in providing professional services and are the users and consumers of all tangible personal property purchases for use in such businesses. Therefore, the tax applies to all purchases by an advertising business. . . .'
A review of the prior audit reveals that the issue of whether the Taxpayer was providing advertising services or selling tangible personal property was raised. Although the items sold were being used in an advertising capacity, the Taxpayer was not acting as an advertising business. The auditor therefore determined that the Taxpayer's purchase of various materials and supplies to produce generic signs and banners sold to member grocery stores was a sale of tangible personal property and not an exempt advertising service. While the Taxpayer's purchases in the current audit are used in connection with providing exempt advertising services, based on the prior audit, it is appropriate to treat the inclusion of the advertising purchases as a new issue insofar as the Taxpayer is concerned. Therefore, advertising purchases will be removed from the calculation of the use tax compliance ratio.
Penalty
The auditor assessed the penalty in accordance with the Taxpayer's compliance ratios. As this was the fourth generation audit, the Taxpayer was required to meet an 85% compliance ratio for both sales and use tax. The Taxpayer met and exceeded the sales ratio requirement at 100%, but failed to meet the use tax requirement with a ratio of 82%.
Subsequent to any audit revisions necessary, the use tax compliance ratio will be recomputed. Once a new compliance ratio has been established, the penalty will be reevaluated in accordance with the above tolerances.
Summary
The audit will be returned to the********* District Office for revisions in accordance with this determination. The auditor will contact the Taxpayer to resolve the issue of chemical sales. Because the Taxpayer has paid the assessment in full, a refund will be issued based upon revisions to the assessment.
If you have any questions, please contact ***** in the Office of Tax Policy at *****.
Rulings of the Tax Commissioner