Tax Type
Retail Sales and Use Tax
Description
Fabricator/Real Property Contractor; Dampers and Louvers Installed in Textile Mill
Topic
Property Subject to Tax
Date Issued
08-09-2000
August 9, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to your client, ***** (the "Taxpayer"), for the period February 1996 through January 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a fabricator/contractor who fabricates tangible personal property for sale and also fabricates tangible personal property for its own use in real property construction contracts. The Taxpayer was audited and assessed tax on dampers and louvers which it installed in textile mills to control the temperature and humidity in the production areas. The auditor held these items as taxable, finding that they became a part of the real property and were not used directly in the production process. The Taxpayer believes these items are an integral part of the production process and therefore exempt from the tax pursuant to Code of Virginia § 58.1-609.3(2). The Taxpayer is requesting that these items be removed from the audit findings.
DETERMINATION
Pursuant to Code of Virginia § 58.1-610, contractors are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract. The same is also true for property furnished to a contractor upon which the tax has not previously been paid. However, exceptions to these general rules are set forth in subsections B and E of § 58.1-610 for property purchased by or furnished to a contractor that would otherwise enjoy one of the industrial exemptions under Code of Virginia § 58.1-609.3.
Code of Virginia § 58.1-609.3(2) 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 general maintenance or administration."
In interpreting the exemption for industrial manufacturing or processing, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 provides that the exemption applies to "machinery, tools, and repair parts therefor, fuel, power, 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." (Emphasis added). Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
Based on the information provided to this office, the dampers and louvers installed by the Taxpayer, and which are the issue of this appeal, are necessary to maintain the proper temperature and humidity to operate the equipment within the textile plant. While I recognize that a climate controlled environment is essential to the manufacture of textile products, I cannot agree that such items are "used directly" in the manufacturing process. As provided above, items which are essential to the operation of a business, but not an immediate part of the production, are subject to the tax. I have enclosed a copy of Public Document (P.D.) 95-110 (5/9/95), which addressed a similar situation.
Based on the above, there is no basis to revise the audit, and the assessment is correct as issued. Payment of the outstanding balance of the assessment should be sent to *****, Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If you should have any questions regarding this matter, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21804K
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to your client, ***** (the "Taxpayer"), for the period February 1996 through January 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a fabricator/contractor who fabricates tangible personal property for sale and also fabricates tangible personal property for its own use in real property construction contracts. The Taxpayer was audited and assessed tax on dampers and louvers which it installed in textile mills to control the temperature and humidity in the production areas. The auditor held these items as taxable, finding that they became a part of the real property and were not used directly in the production process. The Taxpayer believes these items are an integral part of the production process and therefore exempt from the tax pursuant to Code of Virginia § 58.1-609.3(2). The Taxpayer is requesting that these items be removed from the audit findings.
DETERMINATION
Pursuant to Code of Virginia § 58.1-610, contractors are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract. The same is also true for property furnished to a contractor upon which the tax has not previously been paid. However, exceptions to these general rules are set forth in subsections B and E of § 58.1-610 for property purchased by or furnished to a contractor that would otherwise enjoy one of the industrial exemptions under Code of Virginia § 58.1-609.3.
Code of Virginia § 58.1-609.3(2) 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 general maintenance or administration."
In interpreting the exemption for industrial manufacturing or processing, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 provides that the exemption applies to "machinery, tools, and repair parts therefor, fuel, power, 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." (Emphasis added). Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
Based on the information provided to this office, the dampers and louvers installed by the Taxpayer, and which are the issue of this appeal, are necessary to maintain the proper temperature and humidity to operate the equipment within the textile plant. While I recognize that a climate controlled environment is essential to the manufacture of textile products, I cannot agree that such items are "used directly" in the manufacturing process. As provided above, items which are essential to the operation of a business, but not an immediate part of the production, are subject to the tax. I have enclosed a copy of Public Document (P.D.) 95-110 (5/9/95), which addressed a similar situation.
Based on the above, there is no basis to revise the audit, and the assessment is correct as issued. Payment of the outstanding balance of the assessment should be sent to *****, Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If you should have any questions regarding this matter, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21804K
Related Documents
Rulings of the Tax Commissioner