Tax Type
Retail Sales and Use Tax
Description
Integrated power wash system; repair parts for the system do not qualify for manufacturing exemption
Topic
Manufacturing Exemption
Property Subject to Tax
Date Issued
11-02-2012
November 2, 2012
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on behalf of ***** (the "Taxpayer"), regarding the application of the manufacturing exemption to repair parts for an integrated power wash system.
FACTS
The Taxpayer is a manufacturer of paint and coating products. The Taxpayer manufactures various products separately in batches and uses a different production tank for each batch of product produced. The products must be produced separately due to various product formulations and colors. A batch of product is produced in a tank every one to three days, depending on the product. After a batch of product is completed, the tank is power washed using a power wash system that is hard piped into each production tank. Production personnel operate a control panel to select the tank to be cleaned after a product batch is finished. The tank is emptied and a high pressure solvent is applied to the tank agitator and the tank walls. The used cleaning solvent is pumped to solvent recovery for reclamation.
The Taxpayer states that the power wash cleaning system is used in a specialized process that is integral to the quality control of the production process because it maintains the color, chemistry and integrity of each batch of paint and coating product produced. Product batches that are contaminated by a previous product must be scrapped and disposed. The Taxpayer seeks a ruling that repair parts for the integrated power wash system qualify for the manufacturing exemption.
DETERMINATION
Virginia Code § 58.1-609.3 2 iii provides an exemption for "[m]achinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing ... products for sale or resale ...." The term "used directly" is defined in Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration."
The Taxpayer maintains that the power wash system qualifies for the manufacturing exemption because it is essential to and used directly in production line quality control activities. Thus, the repair parts for the power wash system also qualify for the exemption. The Taxpayer suggests that the power wash system is analogous to an electric heated parts cleaner that is discussed in Public Document (P.D.) 95-228 (5/11/92). In this determination, the manufacturing exemption was allowed for an electric heated parts cleaner used by a manufacturer of powder coatings. The parts cleaner was used to clean removable tooling and machinery components that came into contact with the powder coatings during manufacture. The parts were cleaned in the electric heated parts cleaner after each batch run of a powder coating because each batch of product had a distinct color and chemistry. The cleaning of the tooling and machinery components prevented each product batch from being contaminated by the residue from the batch previously produced.
The Tax Commissioner ruled that the use of the parts cleaner was a specialized maintenance activity that ensured the integrity of the manufactured powder coatings. Based on the fact that the frequency of cleaning was dependent upon the completion of each product batch in production, the use of the electric heated parts cleaner was deemed to be an integral part of the taxpayer's manufacturing process and qualified for the manufacturing exemption.
The Taxpayer notes, in this instance, that the power washing of the production tanks occurs after each batch of a product is completed, which is the same frequency of use as the electric heated parts cleaner described in P.D. 95-228. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 interprets the term "used directly" as it applies to manufacturing activities and states that:
-
- The integrated manufacturing process ... includes the production line of a plant, factory, mill, etc., starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the same plant site, and also includes production line testing and quality control.
This regulation indicates that for an item to be used directly in manufacturing, it must be used in an activity that occurs during the actual production process. Thus, any production line testing or quality control activities must occur during production. The regulation elaborates further on this issue and states that in order for an item to be used directly, it must be indispensable to the actual production of products for sale and must be an immediate part of the production process. The use of the power wash system is not an immediate part of the Taxpayer's production process because power washing of the production tanks does not occur during production. The tanks are power washed only after the production of a product batch has ended. In addition, the tanks are power washed every one to three days, which cannot be considered an immediate part of the Taxpayer's production process.
In a more recent determination issued as P.D. 10-244 (10/21/10), a manufacturer of products made of plastic resins appealed an assessment of use tax on purging compounds used to clean production equipment. The purging compounds were run through the machinery's injection lines to remove any resin residue from the previous production run of a product. Due to the fact the injection lines were purged every one to four days, the Tax Commissioner ruled that the cleaning process was not an immediate part of production because the cleaning process did not occur during production. The purging compounds were deemed to be taxable consistent with similar cleaning activities addressed in P.D. 96-337 (11/19/96) and P.D. 92-139 (8/10/92). These public documents state that cleaning activities performed at intervals of two to three days do not constitute active and continuous use for purposes of applying the manufacturing exemption to the maintenance of production equipment.
P.D. 96-304 (10/25/96) is also applicable to the Taxpayer's situation. This determination discusses a newspaper publisher's use of a press cleaner to clean ink, grease and particles off printing presses used to produce the newspaper. The press cleaner was used after every press run and the taxpayer maintained that the press cleaner qualified for the manufacturing exemption. The Tax Commissioner ruled that the press cleaner was not actively and continuously consumed in the maintenance of the printing presses and did not qualify for the manufacturing exemption for this reason. While it may be true that the integrated power wash system is used in a specialized cleaning process that ensures the integrity of the Taxpayer's manufactured products, the power wash system is not used directly in production and does not qualify for the manufacturing exemption.
CONCLUSION
The Taxpayer's integrated power wash system and the repair parts for the system do not qualify for the manufacturing exemption. The Taxpayer should pay the applicable sales or use tax on purchases of parts and supplies for the power wash system.
The Code of Virginia sections, regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this ruling, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
- Craig M. Burns
-
- Tax Commissioner
-
- Craig M. Burns
-
-
-
-
-
-
AR/1-5041787661.S
Rulings of the Tax Commissioner