May 19, 2016
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 November 2010 through June 2013. The contested assessment is paid in full. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of wood products. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property used in the Taxpayer's operations.
The Taxpayer contests the inclusion in the audit of a strapping tool, strapping materials, and repair parts for a strapping machine. The Taxpayer contends that the strapping of wood products is an integral part of the lumber manufacturing process and the equipment and materials used in connection with such strapping qualify for the industrial manufacturing exemption. The Taxpayer provides a video, a diagram and a description to support its contention that the strapping of wood products is the last step of a continuous production process that is performed by machinery on the production line. Once strapped, the bundle of finished lumber is conveyed by forklift from the production area to the shipping area to await distribution to the market.
DETERMINATION
Strapping Materials
Virginia Code § 58.1-609.3 (2) (iii) provides an exemption from the retail sales and use tax for “machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing . . . or converting products for sale or resale.” [Emphasis added.] Pursuant to Va. Code § 58.1-602, manufacturing and processing include “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, and also includes equipment and supplies used for production line testing and quality control.” [Emphasis added.]
In addition, subsection C 2 of Title 23 of the Virginia Administrative Code (VAC) 10210-920 clarifies that the industrial manufacturing exemption applies to tangible personal property, used at the plant site, to convey finished products to the warehouse or storage area. Public Document (P.D.) 05-22 (3/4/05) also clarifies that the industrial manufacturing exemption applies to tangible personal property used to convey finished products from the production line to the shipping area.
Subsection B 2 of Title 23 VAC 10-210-920 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 quality control activities must occur during production. Furthermore, 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.
After receiving the final cuts and planings, the lumber is a finished product but is not ready for sale until it has been strapped into a bundle. Such strapping occurs at the end of the production line and before the bundled lumber is conveyed to shipping for distribution. Based on the specific facts provided in this case, I find that the contested strapping plays an essential and immediate role in the quality control conveyance of the finished lumber to the shipping area. Accordingly, the strapping materials will be removed from the audit.
This determination is made regardless of whether the Taxpayer is the one responsible for delivering goods to customers at the destination point or at its place of business or a combination of both.
Furthermore, the circumstances in this case are distinguishable from the circumstances described in P.D. 10-85 (6/4/10), 10-145 (7/26/10), and 96-301 (10/24/96). In P.D. 96-301, the determination focused on the denial of the packaging exemption and treated strapping used to bind wooden products into a bundle as used only for taxable distribution purposes. The other two determinations relied upon the policy set out in P.D. 96-301 because convincing arguments were not presented for applying the production exemption. However, the Taxpayer in the instant case has made it plainly evident that it uses strapping in exempt production activities.
While I recognize in the instant case that the industrial manufacturing exemption applies, it is important to note that the strapping materials do not qualify for the packaging exemption, which is set out in Va. Code § 58.1-609.3 2 (iv), because the finished lumber product is not placed into a package or container as required by the Supreme Court of Virginia in order to be entitled to the packaging exemption. See Webster Brick Co. v. Department of Taxation, 219 Va. 81, 86, 245 S.E.2d 252, 255, 256 (1978).
Strapping Tool and Repair Parts Thereof
Based on the facts presented and the statutory and regulatory authorities cited above, I find that the contested strapping tool and repair parts thereof are used directly in an exempt production process. As such, the strapping tool and repair parts for the strapping machine will be removed from the audit.
CONCLUSION
The contested assessment will be revised in accordance with this determination. Because such assessment has been paid, a refund of the overpaid amount of tax, penalty and interest will be refunded as soon as practical. Interest on such overpayment amount will also be issued in accordance with Va. Code § 58.1-1833 (A).
The Code of Virginia sections, regulation and public documents cited 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 about this matter, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5752052508.R