Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, vehicle manufacturer
Topic
Collection of Delinquent Tax
Date Issued
05-19-1999
May 19, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***
This is in response to your letter seeking correction of the sales and use tax audit assessment issued to ***** (the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a vehicle manufacturer. An audit for the period October 1994 through September 1997 resulted in an assessment of use tax on various purchases. The Taxpayer takes exception to several taxed purchases and maintains that they qualify for the industrial manufacturing exemption. The Taxpayer also contests the application of penalty.
DETERMINATION
In your letter, eleven items of equipment and machinery are listed as used directly in the manufacturing process. Of these, we find basis to remove four items from the audit based on the information furnished. These are items numbered as 4, 5, 6, and 7 listed in your letter and consist of hardware for exempt equipment (4), vehicle parts (5 and 6), and a heating system (7) used to maintain paint at a constant temperature. We also find basis to revise the audit in accordance with the information furnished for item 9 (engine racks). As for the remaining items, the information submitted is either not sufficient to justify the removal of the item from the audit or the description of use is clearly not within the scope of the exempt manufacturing process.
Item #1 is a bar code system which reads bar codes and identifies the product. You indicate that this system tracks movement of the product and directs paint skids to the correct stations for processing. You also indicate that the bar code system is part of a programmable conveyor system which feeds information to the production control tracking system.
It is my understanding, however, that the bar code system is used to gather administrative data for supervisors to track the production process. When equipment is used for inventory tracking or to record the flow of work, it is considered used in a nonoperational aspect of manufacturing and is taxable.1 Furthermore, it is not clear from the facts provided that the bar code system actually is capable of directing the product through the production process. Rather, it appears that another system may be responsible for such movement. Accordingly, I find insufficient basis to remove this item from the audit.
Item #2 is an engineering analysis system which is used to support testing requirements within design projects and for evaluation of field reliability related issues. Code of Virginia § 58.1-602 defines "manufacturing' as including "equipment and supplies used for production line testing or quality control.' (Emphasis added). Based on the information furnished, the engineering analysis system does not appear to be used in the actual testing or quality control of products on the assembly line. Rather, this system appears to be used in a non-production capacity and is therefore taxable.
Item #3 is a booth which you indicate is used to repair components of the vehicle. Although the booth is in the production area, it is my understanding that it is used to protect other employees. As safety equipment, the booth is not considered used directly in production and is taxable.2
Item #8 consists of tire and wheel changing equipment purchased by the Taxpayer and loaned to another company which uses the equipment at another facility located away from the Taxpayer's plant site. The facts presented do not establish that the equipment is used in a manufacturing process at this separate location. If the only use of the equipment is to mate tires and wheels together, such process, by itself, is not a manufacturing process. Moreover, it is apparent that the Taxpayer does not use the equipment in a manufacturing process. In this regard, I would note that the manufacturing exemption applies to machinery used directly in a manufacturing process, provided the purchaser is a manufacturer and uses the equipment at its plant site. Accordingly, I find no basis for removing this equipment from the audit.
Item #10 consists of engine covers which you indicate become a part of the manufactured product. It is my understanding that these covers were used to protect the engine while in storage at an off-site warehouse and while in transport to the Taxpayer's plant site. The storage of industrial raw materials at a manufacturing plant site is exempt as part of the manufacturing process. However, engines are not raw materials; nor are they stored at the Taxpayer's plant site. Accordingly, the manufacturing exemption is not applicable to the engine covers.
Item #11 consists of laptop computers. You indicate that they are used on the production floor for production programming and troubleshooting. I would note that tangible personal property used in the repair, servicing, and maintenance of production machinery is taxable.3 As these computers appear to be used for taxable maintenance and preproduction activities, the manufacturing exemption is not applicable.
Penalty. The application of penalty on tax deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio. On third and subsequent audits, penalty will generally be applied unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. In this audit, the Taxpayer's use tax compliance ratio is 6%. Accordingly, the application of penalty based on the Taxpayer's use tax compliance ratio test is proper.
Furthermore, the application of penalty to audit deficiencies will not be waived on second or subsequent audits for other than exceptional mitigating circumstances. Although I appreciate the Taxpayer's effort to improve its compliance, the department does not recognize corporate downsizing and employee turnover as exceptional mitigating circumstances. Accordingly, I find no basis to waive the penalty.
Conclusion. The audit will be revised in accordance with this determination. However, the audit may be further revised if you can establish with new and convincing information that Item #1 qualifies for the manufacturing exemption. If you have such new information, please contact ***** Audit Supervisor of the department's ***** District Office, at *****, within the next 60 days.
If no new information is furnished to the department's ***** District Office within the time allotted, we will assume that it is not forthcoming and revise the audit to the extent of the approved adjustments set out in this determination.
Upon completion of the audit revision, a revised bill will be sent to the Taxpayer for the outstanding liability. If you have any questions about this response, please contact ********** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17670R
1Title 23 of the Virginia Administrative Code (VAC) 10-210-920(C)(1).
223 VAC 10-210-920(B)(2) and (C)(2)(Taxable).
3Id.
Rulings of the Tax Commissioner