Tax Type
Retail Sales and Use Tax
Description
Manufacturing process
Topic
Allocation and Apportionment
Property Subject to Tax
Date Issued
02-28-2002
February 28, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you seek correction of the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period September 1997 through June 2000. I apologize for the delay in the department's response.
FACTS
The Taxpayer was a manufacturer of jointed studs for use by the construction industry. The Taxpayer disagrees with the department's assessment of tax on the purchase of a grinder used by the Taxpayer to grind, shape or polish knives that are a part of production machinery. There are three heads in the production machinery that contain knives that cut grooves into wood. The knives need to be sharpened every four hours in order to continue properly cutting the wood. The Taxpayer contends that the grinder is essential to the manufacturing process and believes it is not subject to the retail sales and use tax.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for "machinery or tools or ... supplies ... used directly in ... manufacturing products for sale or resale." (Emphasis added). 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 as general maintenance or administration." (Emphasis added).
Interpreting the above statutes, § B(2) of Title 23 of the Virginia Administrative Code 10-210-920 (copy enclosed) provides:
-
- Items of tangible personal property which are used directly in manufacturing... are machinery, tools and repair parts therefor, fuel, 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. Convenient or facilitative items... or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing... (Emphasis added).
The manufacturing exemption applies only when an item is indispensable to the actual production of a product and is primarily used or consumed immediately in the production process. The removal of the knives for the purpose of maintenance or resharpening is a function that is not an immediate part of the production process. I note that the auditor referenced several public documents that addressed the department's policies with regard to the use of such equipment. Consequently, there is no basis to allow for any adjustment to the department's assessments.
Based on the foregoing, the assessments are correct as issued and are due and payable. The Taxpayer will shortly receive updated bills with interest accrued to date. No additional interest will accrue if the balance due as shown on the updated bills is paid within 30 days from the date reflected on the bill. However, given the Taxpayer's financial situation, I will allow the Taxpayer to establish a partial payment plan with the department's Collections unit if desired. You may contact a representative of the Collections unit at (804) 367-8045 to establish a payment plan.
If you should have any questions regarding this matter, please contact ***** of the department's Office of Policy and Administration, Appeals and Rulings, at ***** @tax.state.va.us or at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AP/32292Q
Rulings of the Tax Commissioner