Tax Type
Retail Sales and Use Tax
Description
Assessments, manufacturer of heating/air conditioning/refrigeration equipment
Topic
Collection of Delinquent Tax
Manufacturing Exemption
Date Issued
08-27-1999
August 27, 1999
Re: § 58.1-1821 Application:
Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek a correction of the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer'), for the period August 1995 through April 1998. I note that the department's assessment has been paid. I apologize for the delay in our response.
FACTS
The Taxpayer is a manufacturer of heating, air conditioning and refrigeration equipment. During the audit period, the Taxpayer replaced safety guards which had been a part of the production equipment when originally purchased. The department's audit included the replacement guards as a taxable purchase of fixed assets. The Taxpayer disagrees with the audit findings and contends that, while the replacement guards are an upgrade mandated by governmental safety standards, they are also used directly in the production process. Accordingly, the Taxpayer believes that the purchase of the replacement guards qualifies for the manufacturing exemption. The Taxpayer seeks an adjustment to the department's audit and a refund of previously paid taxes, penalties and interest.
Additionally, the Taxpayer seeks a waiver of the penalty charges. The Taxpayer states that all sales and use taxes are sent to the corporate offices in another state for subsequent filing and payment. Due to errors in communications and personnel turnover certain payments were not made to the Commonwealth. The Taxpayer provides that it has corrected the problem and that all collected funds will be properly filed and paid in the future. Accordingly, the Taxpayer seeks a waiver and refund of penalties previously paid.
DETERMINATION
Generally
Code of Virginia § 58.1-609.3 provides an exemption from the sales and use tax for "machinery or tools ... used directly in ... manufacturing or processing products for sale or resale.' (Emphasis added). Title 23 of the Virginia Administrative Code (VAC) 10-210-920 supports and interprets the Code of Virginia and indicates that in order for property to be used directly, it must be indispensable to the actual production of products for sale and it must be an immediate part of the production process. This same section further provides that convenient or facilitative items are not used directly even though they may be attached to exempt production machinery.
Press Brake Guards
The guards at issue are light sensors mounted on production machinery as a requirement by the Occupational Safety and Health Administration (OSHA) and the Virginia Department of Labor and Industry. The light sensors shine a beam of light from one contact to the other. If the beam of light is broken, the machinery will automatically shut down to prevent injury to the operator. The sensors are upgrades to guards which were previously a part of the exempt production machinery when originally purchased. The production machinery cannot be operated without the guards installed.
For property to qualify for the manufacturing exemption, it must be used directly in the production process, i.e., an item must be indispensable to actual production and primarily used or consumed immediately in the production process. Further, 23 VAC 10-210-920(B)(2) provides that:
-
- items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery.
Based on the concept of direct use, and as set out in established tax policy, I find that while the guards at issue may be essential to the operation of the machinery, they are not an immediate part of the production process and, therefore, were properly assessed in this instance. Consequently, I do not find cause for an adjustment of the department's audit, and I must deny the Taxpayer's request for refund.
Penalty
Code of Virginia § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032, copy enclosed, supports the Code of Virginia and provides that the application of penalty is to be determined based on whether a satisfactory level of tax compliance has been achieved. For third and subsequent audits of use tax compliance, penalty will generally apply unless a taxpayer's compliance ratio meets or exceeds 85%. As the Taxpayer's compliance ratio on this fourth audit equals 61 %, the penalty has been properly applied. This same section also states that "The application of penalty to audit deficiencies will not be waived ... for other than exceptional mitigating circumstances.'
As a result of the information before me, I cannot agree that changes in personnel or a lack of communication between offices are exceptional mitigating reasons sufficient to warrant consideration of a waiver of the penalty. Consequently, I find no basis for granting the Taxpayer's request for penalty waiver.
Based on all of the foregoing, the department's audit was properly assessed, and there is no cause for any adjustment. If you should have any questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20306Q
Rulings of the Tax Commissioner