Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Items used in manufacturing.
Topic
Taxability of Persons and Transactions
Date Issued
05-08-1998
May 8, 1998
Dear*********:
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** ("the Taxpayer') for the period April 1994 through March 1997.
FACTS
The Taxpayer is a mechanical construction contractor. It designs, manufactures, fabricates and installs high-purity gas, chemical, and water process piping systems for the semiconductor industry and validatable process systems for the biotechnology and pharmaceutical industries.
During the audit period, the Taxpayer entered into contracts for the design, procurement, fabrication, installation, and testing of high purity specialty gas systems and tool hook-up systems at a manufacturing facility in Virginia. The contracts require the Taxpayer to supply all piping materials, equipment and supplies to complete the system.
The department's audit resulted in the assessment of taxes on untaxed purchases of tangible personal property used in the performance of the contracts. The Taxpayer contends that the purchases should not be subject to the tax because the materials are used directly in manufacturing and, therefore, are exempt under Code of Virginia § 58.1-609.3(2)(iii).
DETERMINATION
Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for machinery, tools, fuel, power, energy or supplies "used directly'' in manufacturing products for sale or resale. The term "used directly' is defined in Code of Virginia § 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) 10-210-410 addresses the application of the manufacturing exemption to purchases by contractors performing work for an industrial manufacturer. The regulation provides that a contractor may purchase machinery and tools to be used directly in industrial manufacturing or processing exempt from the tax. The contractor is deemed to be the user or consumer of all supplies used in installing tangible personal property and, therefore, must pay the tax on all such supplies purchased.
Supplies used in installation
A review of the audit report indicates that the untaxed purchases on which tax was assessed include welding equipment and supplies used for installing tangible personal property. Under the regulation cited above, the tax was properly assessed on these items. The welding equipment and supplies used to install exempt production machinery are not used directly in industrial manufacturing and, therefore, do not qualify for the manufacturing exemption. I would note that piping and equipment installed by the Taxpayer and used directly in the manufacturing process were not included in the assessment.
Other materials
The auditor also assessed tax on purchases of cleanroom supplies and miscellaneous materials. It is not clear from the Taxpayer's letter what these items are and how they are used directly in the manufacturing process. Without this information, I cannot determine if the manufacturing exemption is applicable. I would note that, in accordance with Public Document (P.D.) 95-129 (5/19/95) (copy enclosed), supplies used on the production line of the cleanroom may qualify for the manufacturing exemption. Because the exact nature of the items at issue is not known, I am referring this matter to the auditor for further review.
Summary
The tax was properly imposed on the welding equipment and supplies. An auditor from the department's ******Audit Unit will contact you to schedule a mutually convenient time to meet and review the purchases of miscellaneous materials and cleanroom supplies to determine if the manufacturing exemption is available. If any issues remain after the auditor has made his determination, the Taxpayer may file another appeal.
If you have any questions regarding this matter, you may contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner