Tax Type
Retail Sales and Use Tax
Description
Shipping products from VA plants to the out-of-state distribution facility
Topic
Manufacturing Exemption
Date Issued
03-04-2005
March 4, 2005
Re: Request for Ruling: Retail Sales and Use Tax
Dear **********:
This will reply to your letter in which you request a ruling on the application of the retail sales and use tax to certain types of purchases made by ***** (the "Taxpayer").
FACTS
The Taxpayer is a manufacturer of brake products. The Taxpayer operates production facilities in Virginia and a distribution facility in another state. The Taxpayer seeks a ruling on the application of sales and use tax to boxes, shipping trays and similar materials used to ship products from the Virginia production plants to the out-of-state distribution facility. In addition, the Taxpayer requests a ruling on the use of plastic and paper bags, tape, stretch-wrapping equipment and stretch-wrap used in the Virginia production facilities. The Taxpayer has paid sales and use tax on the items that are the subject of this ruling request and will seek refunds of the sales tax paid on those items that qualify for exemption.
RULING
Plant Equipment and Supplies
Virginia Code § 58.1-609.3 2(iii) provides an exemption for machinery, tools, repair parts and supplies used directly in manufacturing and processing. The terms "manufacturing" and "processing" are defined in Va. Code § 58.1-602 to include
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- 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 conveyed to a warehouse at the production site . . . .
The Taxpayer uses various types of plastic and paper bags to store and handle raw materials at its plant sites. The raw materials become a component part of the brake products manufactured by the Taxpayer and are in a powder or dust form. For this reason, the bags must be used to store the materials at the plant site and to transport the raw materials during production. As defined above, the scope of the manufacturing exemption includes the handling and storage of raw materials at the plant site. Based on the information provided, the bags are deemed to be used directly in the Taxpayer's production process at the plant site and qualify for the manufacturing exemption when used to handle and store raw materials.
The Taxpayer uses clear trash bags to dispose of the bags used to handle raw materials during production. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 C 2 discusses production activities conducted by manufacturers and lists examples of taxable and exempt tangible personal property used in production. The regulation states that tangible personal property used to dispose of plant wastes is taxable unless it is certified pollution control equipment. While the disposal of plant wastes may be essential to the Taxpayer's manufacturing business, waste disposal is not an exempt manufacturing activity. Trash bags used for waste disposal are subject to the tax.
Shipping Equipment and Supplies
Virginia Code § 58.1-609.3 2(iv) provides an exemption for "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale . . . ." [Emphasis added.] This exemption is applicable to manufacturers that use the packaging equipment and materials at the plant site prior to the completion of production. Production is completed when the product has been finished or completed for sale and has been conveyed to storage at the plant site, or to a shipping area at the plant site if the product has not been stored prior to shipment. Based on the exemption cited, the Taxpayer's purchases of corrugated boxes, shipping trays; and pads are exempt packaging materials when used on the production line to package products for shipment to the distribution facility or to customers.
The Taxpayer also shrink-wraps boxes or trays containing its products to pallets for shipment. The shrink-wrap and shrink-wrapping machinery are used at the plant site prior to storage or shipment of the products. Under Virginia law, pallets used to transport products do not generally qualify as "packaging" materials. However, the Department ruled in Public Document 00-169 (9/13/2000) that containers purchased by an industrial manufacturer were not subject to tax if movement of the products placed in the container was restricted in more than one plane of direction. This ruling discusses pallets used by manufacturers and states that pallets qualify as "packaging" materials if the products the pallets carry are bound to the pallet in a manner that restricts movement of the products in more than a single plane of direction and the packaging activity occurs at the plant site.
The Taxpayer shrink-wraps its products to pallets in a manner that restricts movement of the products in more than one plane of direction. This creates a package for purposes of the packaging materials exemption. The Taxpayer's purchase of shrink-wrap and pallets qualifies for exemption when these items are used in the manner described. The shrink-wrapping equipment is used directly as part of the Taxpayer's production process and qualifies for exemption.
The Taxpayer uses clear tape and masking tape in its production facilities. Tape used to seal boxes and cartons for shipment of brake products qualifies for the packaging exemption. Tape that is used in administrative offices, used to label or seal trash bags, or used for other general purposes would not be considered "packaging" and is subject to the sales and use tax.
An auditor will contact you within 30 days to address your refund request based on the results of this ruling. The Code of Virginia sections, public documents and regulations cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions concerning this ruling, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/51326S
Rulings of the Tax Commissioner