Tax Type
Retail Sales and Use Tax
Description
Metal Recyclers
Topic
Exemptions
Date Issued
07-20-1999
July 20, 1999
Re: Request for Ruling: Retail Sales and Use Tax
Dear***
This will reply to your request for a ruling made on behalf of an anonymous client (the "Taxpayer').
FACTS
The Taxpayer purchases junk cars from junkyards, crushes the cars, and sells the crushed cars to metal recyclers. The Taxpayer seeks confirmation from the department that it is an industrial processor and qualifies for the sales and use tax exemption in Code of Virginia Sec. 58.1-609.3(2). The Taxpayer wishes to know if certain equipment used in its crushing operation is exempt from sales and use tax.
RULING
The department has previously ruled that the processing of scrap metal is an industrial activity that is exempt from sales and use tax, provided the processing is done for sale or resale (see the enclosed copy of P.D. 87-46, 2/26/87). The Taxpayer is processing for resale to metal recyclers. Code of Virginia Sec. 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for machinery, repair and replacement parts for exempt machinery, tools, fuel, power, energy, or supplies used directly by industrial processors. Therefore, any items used directly in the Taxpayer's crushing operation may be purchased exempt of the tax.
Used directly refers to activities which are an integral part of the production of a product. Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) discusses the term "used directly' and states that "[t]he integrated manufacturing process noted above includes the production line of a plant, factory, mill, etc., 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 or completed for sale and conveyed to a warehouse at the same plant site....
Crusher
The Taxpayer uses a crusher to crush the cars. The Virginia Supreme Court, in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980), determined that the definition of "processing' only requires that the product undergo a treatment rendering the product more marketable or useful. Based on the above and the information provided, the crusher makes the cars more marketable or useful and is used directly in the processing operation. Therefore, the crusher qualifies for the industrial manufacturing exemption. The Taxpayer may purchase crushers, crusher parts, fuel, supplies and other items used with the crusher exempt of the tax by issuing suppliers a properly completed Form ST-11.
Loader
The crushed cars are placed onto a loader, which is a conveyor system. The loader transports and loads the crushed cars onto trucks. The trucks haul the crushed cars to the Taxpayer's customers (the metal recyclers). Based on your description of the use of the loader, I cannot agree that the loader is used directly in the Taxpayer's crushing operation. The Taxpayer's process is completed when the crushed car is placed on the loader. The loader transports and loads the crushed cars onto trucks that deliver the crushed cars to the Taxpayer's customers. The loader is used in a taxable distribution activity.
Distribution is defined in VAC 10-210-920(C)(3) as "the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the storage of a product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale.' There is no storage of the crushed cars at the plant site and for this reason, processing ends when the cars have been crushed. While the loader is essential to the Taxpayer's operation, it is not used directly in the processing operation and does not qualify for exemption.
Single Plant Site
The Taxpayer indicates that it uses mobile equipment in its processing operation, but the equipment is normally used at a single plant site. The industrial processing exemption is applicable only when the processing is conducted at a single plant site. If the Taxpayer conducts its processing operation at multiple sites, a preponderance of use test is used to determine if the equipment is taxable or exempt. This test is discussed in Title 23 VAC 10-210-920(D), which states that when machinery is used in both taxable and exempt activities, sales and use tax applies if the preponderance of the item's use is in non-exempt activities. Therefore, the tax applies in full if the item is used 50 percent or more in non-exempt activities. In this case, use of the crushing equipment at plant sites other than the main site 50 percent or more of the time constitutes a non-exempt activity.
This response is based on the facts that were presented. Any change in the facts may alter this ruling. If you have any questions concerning this ruling, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17768S
Re: Request for Ruling: Retail Sales and Use Tax
Dear***
This will reply to your request for a ruling made on behalf of an anonymous client (the "Taxpayer').
FACTS
The Taxpayer purchases junk cars from junkyards, crushes the cars, and sells the crushed cars to metal recyclers. The Taxpayer seeks confirmation from the department that it is an industrial processor and qualifies for the sales and use tax exemption in Code of Virginia Sec. 58.1-609.3(2). The Taxpayer wishes to know if certain equipment used in its crushing operation is exempt from sales and use tax.
RULING
The department has previously ruled that the processing of scrap metal is an industrial activity that is exempt from sales and use tax, provided the processing is done for sale or resale (see the enclosed copy of P.D. 87-46, 2/26/87). The Taxpayer is processing for resale to metal recyclers. Code of Virginia Sec. 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for machinery, repair and replacement parts for exempt machinery, tools, fuel, power, energy, or supplies used directly by industrial processors. Therefore, any items used directly in the Taxpayer's crushing operation may be purchased exempt of the tax.
Used directly refers to activities which are an integral part of the production of a product. Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B)(2) discusses the term "used directly' and states that "[t]he integrated manufacturing process noted above includes the production line of a plant, factory, mill, etc., 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 or completed for sale and conveyed to a warehouse at the same plant site....
Crusher
The Taxpayer uses a crusher to crush the cars. The Virginia Supreme Court, in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980), determined that the definition of "processing' only requires that the product undergo a treatment rendering the product more marketable or useful. Based on the above and the information provided, the crusher makes the cars more marketable or useful and is used directly in the processing operation. Therefore, the crusher qualifies for the industrial manufacturing exemption. The Taxpayer may purchase crushers, crusher parts, fuel, supplies and other items used with the crusher exempt of the tax by issuing suppliers a properly completed Form ST-11.
Loader
The crushed cars are placed onto a loader, which is a conveyor system. The loader transports and loads the crushed cars onto trucks. The trucks haul the crushed cars to the Taxpayer's customers (the metal recyclers). Based on your description of the use of the loader, I cannot agree that the loader is used directly in the Taxpayer's crushing operation. The Taxpayer's process is completed when the crushed car is placed on the loader. The loader transports and loads the crushed cars onto trucks that deliver the crushed cars to the Taxpayer's customers. The loader is used in a taxable distribution activity.
Distribution is defined in VAC 10-210-920(C)(3) as "the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the storage of a product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale.' There is no storage of the crushed cars at the plant site and for this reason, processing ends when the cars have been crushed. While the loader is essential to the Taxpayer's operation, it is not used directly in the processing operation and does not qualify for exemption.
Single Plant Site
The Taxpayer indicates that it uses mobile equipment in its processing operation, but the equipment is normally used at a single plant site. The industrial processing exemption is applicable only when the processing is conducted at a single plant site. If the Taxpayer conducts its processing operation at multiple sites, a preponderance of use test is used to determine if the equipment is taxable or exempt. This test is discussed in Title 23 VAC 10-210-920(D), which states that when machinery is used in both taxable and exempt activities, sales and use tax applies if the preponderance of the item's use is in non-exempt activities. Therefore, the tax applies in full if the item is used 50 percent or more in non-exempt activities. In this case, use of the crushing equipment at plant sites other than the main site 50 percent or more of the time constitutes a non-exempt activity.
This response is based on the facts that were presented. Any change in the facts may alter this ruling. If you have any questions concerning this ruling, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17768S
Rulings of the Tax Commissioner