Tax Type
Retail Sales and Use Tax
Description
Manufacturer/ Processor / Equipment that qualifies for the manufacturing exemption.
Topic
Manufacturing Exemption
Date Issued
03-19-2014
March 19, 2014
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you request a ruling on the application of the Virginia retail sales and use tax to solar electric generating equipment used by ***** (the "Taxpayer") to produce electricity for sale or resale.
FACTS
The Taxpayer proposes to develop, construct and operate a utility-scale solar energy generating facility in Virginia with several potential expansion phases. The assets associated with each phase are owned by separate project companies that are Delaware limited liability companies registered to do business in Virginia.
The Taxpayer indicates that it is not a public service corporation and does not intend to become one. According to the Taxpayer, its organizational documents do not state that it is a public service corporation or a public service company, and its rates associated with electricity manufactured are not regulated by the State Corporation Commission (SCC). The Taxpayer also indicates that it does not want or have the power of eminent domain.
The Taxpayer requests a ruling on whether it is deemed a manufacturer or processor entitled to the manufacturing exemption. The Taxpayer also requests a ruling that certain equipment qualifies for the manufacturing exemption.
RULING
Application of the Manufacturing Exemption
Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for the following:
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- (i) Industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product; (ii) industrial materials that are coated upon or impregnated into the product at any stage of its being processed, manufactured, refined, or converted for resale; (iii) machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale; (iv) materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale; or (v) equipment, printing or supplies used directly to produce a publication described in subdivision 3 of § 58.1-609.6 whether it is ultimately sold at retail or for resale or distribution at no cost. Machinery, tools and equipment, or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is directly in processing, manufacturing, refining, mining or converting products for sale or resale. The provisions of this subsection do not apply to the drilling or extraction of oil, gas, natural gas and coalbed methane gas. In addition, the exemption provided herein shall not be applicable to any machinery, tools, and equipment, or any other tangible personal property used by a public service corporation in the generation of electric power, except for raw materials that are inputs to production of electricity, including fuel. [Emphasis added.]
Effective September 1, 2004, the public service corporation exemption for electric utilities was repealed, except for raw materials and fuel consumed in the production of electricity. For additional information, see Public Document (P.D.) 04-122 (8/30/04).
Based on the facts presented, the Taxpayer is not organized as a public service corporation. Furthermore, the Department's longstanding policy is that the production of electricity for sale or resale is a process entitled to the industrial manufacturing and processing exemption. See P.D. 86-218 (11/3/86), 89-274 (10/25/89), and 02-44 (4/9/02). In P.D.02-44, take note that the industrial manufacturing and processing exemption was applicable to an entity that produced electricity for sale but was not registered with the SCC as a public service corporation in Virginia. Because the Taxpayer in this instance is not a public service corporation but is an entity producing electricity for sale or resale, it will be entitled to such exemption.
Application of the Manufacturing Exemption to Equipment
The Taxpayer indicates that the following equipment will be used in manufacturing electricity for sale or resale: solar panels, inverters, racking and mounting equipment, wires, cables and conduit, meters and all equipment up to and including the step-up transformers incorporated into the solar facility.
The Taxpayer states that the solar panels capture sun light to create electrons. The inverters are used to convert the variable direct current output of the solar panels into a utility frequency alternating current that can be fed into the electrical grid for distribution and sale. The racking and mounting equipment secure the panels at specific angles that maximize the output of the solar facility. The wires, cables and conduit allow for the electricity to flow from the solar panels to the inverters to the transformers to prepare the electricity for sale. The meters measure the electricity output of the solar facility to understand how much of the product is being sold. The step-up transformers transform the voltage of the energy to allow for distribution of the product for sale. The Taxpayer claims that all of the foregoing pieces of equipment are used directly in the manufacturing of electricity for sale.
All exemptions from the retail sales and use tax are required to be strictly construed against the one claiming the exemption. Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). With this strict construction rule in mind, Title 23 of the Virginia Administrative Code 10-210-920 B 2 defines the term "used directly" as meaning "those activities that are an integral part of the production of a product, including all steps of an integrated process, but not including incidental activities such as general maintenance, management, and administration." [Emphasis added.] In conformity with the strict construction rule, this regulation further states:
Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, 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, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery. Furthermore, the fact that the use of a particular item, such as firefighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing. [Emphasis added.]
Based on the foregoing and the facts presented, I find that the manufacturing exemption is applicable to the solar panels, inverters, wires and cables (through which electricity flows), and the step-up transformers. In conformity with the strict construction rule and based on the facts provided, it appears that the manufacturing exemption does not apply to the racking and mounting equipment, the conduit, and the meters. These latter items of equipment appear to play a facilitative role and thus do not appear to be an immediate part of the production of electricity. For instance, conduit that serves as a protective cover for wire or cable is not used immediately in a production process. Meters that measure how much product is sold are used in a managerial or administrative function. Racking and mounting equipment that is not a component part of the solar panels when purchased is not considered a part of exempt equipment.
I trust this responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia section, regulation and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, you may 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/1-5546333361.R
Rulings of the Tax Commissioner