Tax Type
Retail Sales and Use Tax
Description
Assessed tax on untaxed sales and purchases of tangible personal property
Topic
Manufacturing Exemption
Records/Returns/Payments
Tangible Personal Property
Date Issued
07-16-2014
July 16, 2014
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period October 2009 through September 2012 for the location. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a manufacturer of packaged concrete and cement products. An audit resulted in the assessment of sales tax on certain untaxed sales of the Taxpayer's products and the assessment of use tax on untaxed purchases of tangible personal property.
The Taxpayer contests one sale assessed in the audit and maintains that it is purchased for tax-exempt purposes. The Taxpayer contests several purchases included in the audit and maintains that such items should be removed because tax was accrued or correctly paid to another state, or there exists some other reason for their removal.
DETERMINATION
Virginia Code § 58.1-205 deems assessments issued by the Department as prima facie correct. This means that the burden of proving that the assessment is incorrect is upon the Taxpayer.
Sales
Line Item 2. The Taxpayer requests the removal of a sales invoice issued to one customer because the Taxpayer accepted such customer's resale exemption certificate in good faith. The documentation provided indicates that the customer did not submit a resale exemption certificate but submitted the Form ST-11 exemption certificate claiming the industrial materials exemption. The exemption claimed is stated as follows:
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- Industrial materials for future manufacturing, processing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production or become a component part of the finished product; industrial materials that are coated upon or impregnated into the product at any stage of its manufacture, processing, refining, or conversion for resale.
The certificate is dated May 19, 2010, although the item was sold in April 2010. Generally, a certificate of exemption should be received prior to or by the date of sale in order for the Taxpayer to establish that the transaction is exempt from the retail sales and use tax. In this case, the certificate is provided in the month following the shipping date of all of these sales. As such, good faith acceptance cannot be claimed because the certificate was not relied upon to exempt the transaction from the tax. Despite this, we may examine whether the Taxpayer is entitled to claim an exemption or not for the transaction in question.
The exemption certificate indicates that the customer is engaged in coal mining support. The description "coal mining support" does not establish that the purchaser is engaged in manufacturing, processing, refining or conversion of products for resale. Based on a review of the customer's website, the purchaser is more accurately described as a contractor engaged in site preparation and reconstruction of tunnels, shafts and passageways in deep mines. Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-960 A 3 b, the construction of tunnels, shafts, and passageways in underground mines is an exempt site preparation activity. Pursuant to Title 23 VAC 10-210-960 A 3 c, the reconstruction of tunnels, shafts, and passageways in deep mines is an exempt extraction activity. Accordingly, tangible personal property used directly by this customer to construct or reconstruct a tunnel, shaft or passageway in an underground mine may be purchased exempt of the tax. Because the customer is not the mine owner, it may not use the Form ST-11 to request an exemption from the tax. Rather, for future mine construction or reconstruction projects for deep mines, the customer must request the Form ST-11A from the Department and present such certificate to its vendors, such as the Taxpayer, to claim an exemption from the retail sales and use tax. The Taxpayer should no longer accept the Form ST-11 from this customer. For this audit only, I will allow the exemption to apply and remove line item 2 from the audit.
Fixed Assets
The Taxpayer contests the inclusion of line item 3. This line item is an estimate of the taxable assets purchased for the period May through September 2012 because records were not provided. The Taxpayer indicates that it purchased two assets for ***** during this period. A label machine was purchased for use at ***** to print labels to identify the particular contents of its products. The information provided appears to indicate that the label machine also places the labels on the products for sale. For these reasons, the Taxpayer claims that this item is used in an exempt manufacturing process.
Title 23 VAC 10-210-920 C 2 defines "production" as including "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." Based on the facts presented, it appears that the products are not completed for sale until the labels are applied to the products. Furthermore, the production of labels in this case is an exempt subprocessing activity as the label machine produces tangible personal property for use directly in the production process.
The Taxpayer also furnishes an invoice indicating that it purchased a server in another state where such item was initially delivered. Sales tax was correctly paid to such other state. This item was subsequently transferred for use at the Taxpayer's Virginia location. Because first use was made outside of Virginia, a credit for the sales tax paid to such other state is allowed against the Virginia use tax due. Because such other state's sales tax rate exceeds Virginia's use tax rate, no Virginia use tax is due. See Title 23 VAC 10-210-450.
Based on the foregoing, I find basis to remove line item 3 from the audit.
Expensed Purchases
The Taxpayer takes issue with several items assessed in the contested purchases exceptions list as follows:
Line Item 1: This item is a replacement manual lever valve and air cylinders for an air compressor. Air from the air compressor is used to move polymers produced by the Taxpayer into 10-ounce shipping tubes, which hold the polymers until used by the customer. Because this line item constitutes replacement parts for exempt production equipment, it will be removed from the audit.
Line Item 2: This purchase is for ball bearings used in a turn table. The Taxpayer's packaging equipment puts the shipping tubes filled with the Taxpayer's product into a shipping box that is set on top of a turn table. The turn table must turn 360 degrees to ensure the proper closing of each shipping box. The Taxpayer contends that the turn table is exempt production equipment. Pursuant to Title 23 VAC 10-210-920 B 2, items used directly in manufacturing must be "indispensable to the actual production of the products for sale" and must be "used as an immediate part of such production process." While the turn table may be essential to the production process, it has not been shown that it acts upon the product as to become an immediate part of the actual production process. Accordingly, this item will remain in the audit.
Line Item 7: The Taxpayer contends that this transaction is for calibrating a viscometer. The Taxpayer's contention, however, cannot be confirmed by a review of the partial copy of the invoice presented. For instance, the first page of the invoice is missing. Furthermore, the second page of the invoice references a viscometer and purchase order 49096 but makes no mention of calibrating a viscometer. The Taxpayer was previously asked by a member of the Department's Appeals and Rulings staff to furnish a copy of the purchase order, but none was furnished. Absent proof that the transaction is for an exempt calibration service, the transaction will be treated as the purchase of tangible personal property.
According to the vendor's website, it sells laboratory and online viscometers. While the kind of viscometer at issue in this transaction is unknown, the auditor indicates that it is not used on the production line but used in a lab for testing purposes. Pursuant to Title 23 VAC 10-210-920 C 2, equipment used for production line testing or quality control is classified as exempt production equipment. Thus, if the transaction is for the purchase of tangible personal property, the manufacturing exemption would not be applicable because the instrument is not used on the production line. Because the Taxpayer has not met its burden of proof, this item must remain in the audit.
CONCLUSION
For items in which the burden of proof was not met, additional information and documentation may be furnished to the auditor,***** within 45 days of this letter. ***** will be contacting you soon to make arrangements for the receipt of such information and documentation within the allotted time. If you have any questions about the revision, please contact ***** at *****.
The audit will be revised in accordance with this determination after receipt of the additional items or when the 45 day period has expired, whichever is sooner. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia section and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this determination, please contact ***** in the
Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5498742281.R
Rulings of the Tax Commissioner