Tax Type
Retail Sales and Use Tax
Description
Sawmill: Possible Industrial Production Exemption for Sawdust Removal Equipment
Topic
Exemptions
Property Subject to Tax
Date Issued
08-14-2001
August 14, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in response to your letter of June 12, 2001, requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a lumber manufacturer. An audit for the period February 1998 through February 2001 resulted in assessments of tax on untaxed sales and purchases of tangible personal property. The audit assessments have been paid.
The Taxpayer takes exception to the use tax assessed on its sawdust collection system used to remove sawdust from production equipment. The Taxpayer claims that the saws will not function unless the sawdust is removed. Because the sawdust is a byproduct of its production process and was sold during a portion of the audit period, the Taxpayer maintains that the sawdust removal equipment is an extension of the production process and should, therefore, qualify for the industrial production exemption of Code of Virginia § 58.1-609.3(2).
It is my understanding that sawdust is produced when (i) used lumber is replaned, reshaped, or otherwise re-sawn in some manner as to produce flooring or other wood products for sale, and (ii) wood scraps are converted into sawdust. Before May 1998, the Taxpayer sold most of its sawdust and, thus, had sold sawdust during the first three months of the audit period. Beginning May 1998, however, it is my understanding that environmental regulations prevented the Taxpayer from selling sawdust containing lead paint particles. The Taxpayer also cites an inability to sell sawdust currently due to market conditions.
Code of Virginia § 58.1-609.3(2) provides an exemption from the tax for machinery used directly in processing or manufacturing products for sale or resale. The terms "manufacturing" and "processing" are defined in Code of Virginia § 58.1-602 to include "the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale . . . and also includes equipment and supplies used for production line testing and quality control." That same section defines "used directly" to mean "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."
As noted by Title 23 of the Virginia Administrative Code (VAC) 10-210-920(B), the industrial production exemption specifically excludes items which are essential to the operation of a business but not an immediate part of actual production, even though such items may be directly attached to exempt production equipment. Furthermore, the use of a particular item that is required by a federal, state, or local law is not, by itself, dispositive of direct usage in production.
Moreover, 23 VAC 10-210-920(C) lists as taxable "[t]angible personal property used to dispose of plant wastes and pollutants other than equipment designated as certified pollution control equipment under the provisions of § 58.1-3660 of the Code of Virginia," and "[t]angible personal property used in the repair, servicing, and maintenance of production machinery."
Based on these authorities, the department has traditionally held that sawdust removal systems do not qualify for the industrial manufacturing exemption. For example, Public Document (P.D.) 90-54 (4/12/90) addresses a sawdust removal system that was essential for the operation of production equipment and required for safety and pollution control purposes. This system, however, was deemed not used directly in the actual production of products because the system was not used primarily to perform a production function, such as a quality control operation that protects the integrity of the product. The facts in P.D. 90-54 suggest that the sawdust was not resold as the sawdust removal system appeared to only serve as a waste disposal system.
On the other hand, the industrial production exemption may apply if a business is manufacturing or processing sawdust for sale or resale, and the production is industrial in nature. See 23 VAC 10-210-920(A). However, production machinery is exempt only if the preponderance of its use is in an exempt production activity. See 23 VAC 10-210920(D). Thus, for the exemption to apply to the Taxpayer's sawdust collection system and its scrap lumber shredding system, it must be used more than 50% of the time as a direct part of a process to produce sawdust for sale or resale.
CONCLUSION
Although a sawdust collection system may be necessary to maintain or facilitate the proper and safe operation of production equipment, this activity as noted above is not deemed part of an exempt quality control function. Furthermore, as the bulk of the sawdust produced by the Taxpayer was seldom resold, especially since May 1998, the contested equipment cannot be considered an exempt conveyance or production system. For these reasons, I find no basis for applying the industrial production exemption to the items at issue. Moreover, no evidence has been presented that this equipment qualifies for the certified pollution control exemption of Code of Virginia
§ 58.1-609.3(9). Accordingly, the assessment is deemed proper as issued.
If the Taxpayer obtains certification from the Department of Environmental Quality that the sawdust collection system qualifies for the certified pollution control exemption noted above, it may request the appropriate refund from the department's ****** District Office. The Taxpayer has up to three years from the date of assessment to obtain and forward such certification to the department.
If you have any questions about this response, please contact ***** of the department's Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/35353R
Rulings of the Tax Commissioner