Pollution Control, Dust Collection, Exhaust Filtering
October 7, 2024
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will respond to the letter submitted on behalf of ***** (the “Taxpayer”). The Taxpayer seeks a ruling as to the applicability of the Virginia retail sales and use tax manufacturing exemption to the operations of two fuel pellet production facilities in Virginia. I apologize for the delay in responding to your correspondence.
FACTS
The Taxpayer, a renewable energy company, produces wood pellets that are sold as an alternative to coal. The Taxpayer’s processing of the raw material (“biomass”), biological material derived from plants such as wood mill residue, wood chips, logs, and low-grade wood fiber, and production of the wood pellets occurs at two production facilities in Virginia, the ***** (“Plant A”) and the ***** (“Plant B”). According to the Taxpayer, the conversion of the raw material biomass into wood pellets begins at the first production plant and is finished at a second production plant. The Taxpayer requests a ruling as to the application of the manufacturing exemption to the machinery and equipment used in its operations at both production plant sites in Virginia.
RULING
Strict Construction of Exemptions
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the Virginia Supreme Court requires strict construction of sales tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973), Commonwealth v. Community MotorBus, 214 Va. 155 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Industrial Manufacturing Exemption
Virginia Code § 58.1-609.3 2 iii provides an exemption from the Virginia retail sales and use tax for machinery, tools, fuel, power, energy, or supplies used directly and predominantly in manufacturing products for sale or resale. In order for a business to obtain the exemption, it must be manufacturing or processing products for sale or resale and such production must be industrial in nature in accordance with the definition of manufacturing under Virginia Code § 58.1-602.
In interpreting the exemption statute, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1, provides that a business is deemed an “industrial manufacturer” if its business classification falls within codes 20 through 39 of the Standard Industrial Classification Manual (SIC) published by the U.S. Department of Commerce. The SIC Manual has since been replaced with the North American Industrial Classification System (NAICS) Manual, which is now used by the Department to determine those industries that qualify as industrial processors or manufacturers. Both the SIC and NAICS manuals assign industrial classifications according to the primary business activity of the business. Unless the primary business activity is a manufacturing activity in accordance with these classifications, the Department does not consider the business activity to be industrial in nature.
The Taxpayer did not provide its business classification under either the SIC or the NAICS. This ruling is issued on the assumption that the Taxpayer’s classification supports qualification as industrial in nature.
Further, in order for an item of tangible personal property to qualify for the industrial manufacturing exemption, it must be “used directly” in the production process and considered to be an indispensable and an immediate part of the production process. See Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81 (1978). The term “used directly” is defined in Virginia Code § 58.1-602 as “those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing...process, but not including ancillary activities such as general maintenance or administration.”
Under Title 23 VAC 10-210-920 B 2, an integrated manufacturing process includes the production line of a plant, factory, or mill, 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. The integrated process also includes production line testing and quality control. This section of the regulation also clarifies that convenient or facilitative items or items that 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.
In addition, the Taxpayer’s plant sites make considerable use of conveyor systems. As promulgated in Title 23 VAC 10-210-920(B)(2), “[c]onvenient 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.” Thus, the legs and supports attached to an otherwise exempt conveyor are not used directly and do not qualify for the exemption. For purposes of the ruling, the exemption for the items of tangible personal property below is limited to the portion of equipment deemed to be used directly in manufacturing and would not include convenient or facilitative items that may be attached to the property.
Title 23 VAC 10-210-920 C 2, also, notes that “[a]ncillary activities such as plant construction are not part of production and are taxable. Accordingly, construction materials such as concrete, structural steel, and roofing which becomes permanently incorporated into the production plant and machinery and tools used in the construction of the plant are taxable.” As such, all materials used in the construction of the storage domes at Plant B, for example, would be taxable, including the mylar covering. The mechanized gates used to deliver product from the dome to the reclaim conveyer would be taxable, as well, if they are incorporated into the real property of the dome.
In order to provide an accurate analysis of the Taxpayer’s ruling inquiry, Department personnel toured the plant sites in order to observe the machinery and equipment at issue. This ruling will address the machinery based on their function at the plant site at which they are located. The Taxpayer’s request includes a list of property that it believes is eligible for the industrial manufacturing exemption. Each item will be addressed separately below.
Plant A
The Taxpayer’s production process at this facility is where the raw materials are received, weighed, stored, and then used in processing to produce a partially finished product that is conveyed to Plant B. The production activities at this site are categorized by the Taxpayer into four major processes: raw material handling and storage; debarking and chipping; dry processing; and formation (extrusion and cooling) of the fuel pellets.
Exempt Property Used Directly In Raw Materials Handling and Storage
• Truck Scale that weighs the logs and other raw materials upon arrival at the plant
• Hydraulic Truck Dumper that delivers waste from the chipping process to a furnace fuel reclaim system, dryer fuel bin, or chip storage pile
Exempt Property Used Directly in Debarking and Chipping Production
• Cranes that lift logs into a debarking drum
• The debarking drum that removes bark from logs
• The knuckleboom hydraulic loader that feeds debarked logs into a woodchipper
• Woodchippers that reduce logs into to chipped raw biomass
• Conveyer system from chipper to dryer to the extent it is not real property
Exempt Property Used Directly in Dry Processing
The raw material biomass must be dried to reduce the moisture content to a consistency of between 5% and 8% prior to being extruded into pellets. The Taxpayer explains that a higher moisture level would result in a product that would be more difficult for its customers to use.
• Furnace Fuel Bin, Furnace Indirect Draft Fans, and front loader equipment used to produce heat to dry raw biomass
• Metering Bin that stores raw biomass prior to drying
• Rotary Dryer that dries raw biomass chips
• Dryer Collection Conveyer Belt that moves dried biomass through size screens to the extent it is not real property
• Moisture Control Meter that monitors the moisture content of the dried biomass
• Screens that separate biomass chips by size
• Dry Hammermill Island machinery that pulverizes the larger chips separated by the Screens into suitable sizes
• Dry Storage Bins that handle and store dried biomass chips received from the Dried Chips Transfer Conveyor and Dry Hammermill Island
Pellet Formation
• Dried Chips Transfer Conveyor that to the extent it is not real property transfers the dried biomass chips to the next production phase
• Ripening Bins that measure moisture content and meter the biomass to a pellet press
• Pellet Press that uses high temperature and pressure to plasticize the chemical compounds with the chips resulting in an extruded product that will hold its form
Plant B
At Plant B, additional moisture reduction of the wood pellets is performed in order to increase quality and marketability before the final product is shipped to overseas markets. Again, the Taxpayer has broken down the production activities at this facility into the following process categories: receiving, dome storage, and shipping.
Exempt Property Used Directly In Receiving
As delineated in Virginia Code § 58.1-609.3(2) and § 58.1-602, the manufacturing exemption extends until the product is finished and transferred for storage.
• Truck Scales that weigh received wood pellets
• Truck Bottom Dumps into which the received wood pellets are dumped
• Transfer Conveyor Belts to the extent they are not real property that deliver the pellets to storage domes
Property Used In The Storage Domes
The 45,000 metric ton storage domes are structures made of concrete and rebar covered by an inflatable mylar covering. These domes are designed and equipped to keep moisture levels low and continue the drying process of the biomass pellets.
Inside of the domes are high-capacity air handling systems that aid in the evacuation of heat and maintains the pellets’ low moisture level as they await being moved for shipping. This system is triggered by temperature gauges that identify when heat levels are too high. Title 23 VAC 10-210-920 B 2 explains that the tangible personal property used in production line testing and quality control is also eligible for the exemption. It has been the long-established policy of the Department that the standard of exemption applicable to quality control is strict, such that the activities must be intended to maintain the integrity of the products being produced, and it must occur on the production line. See P.D. 93-135 (6/4/1993), P.D. 01-204 (12/7/2001), and P.D. 04-71 (8/24/2004). In the instant case, the air handling system and temperature gauges would be exempt from the retail sales and use tax.
The Taxpayer believes processing continues when the pellets are moved to the storage domes because different pellet batches are combined when they are dumped in the dome. The Department ruled on a similar issue in Public Document (P.D.) 82-183 (12/14/1982). This ruling address a coal processing activity in which coal of different grades is combined and mixed to customer specification at a terminal site. The Department ruled this constituted a continuation of processing because of the coal grade mixing, as the coal was not prepared for sale to the customer until this mixing was completed. The Taxpayer argues the blending of different pellets should be eligible for the same treatment. Based on the Taxpayer’s explanation that different grades of pellets are blended to meet customer standards, it would meet eligibility requirements for the exemption.
Property Used In Preparation for Shipping
When sold, the pellets are discharged via mechanized gates for shipping through reclaim conveyors equipped with belt weigh scales, a metal detector, and belt magnet to ensure the proper amount and quality of material being moved toward the ship. The pellets are fed onto an outbound conveyor and deposited onto a shiploader feed conveyor that will deposit product on a travelling shiploader conveyor to load them onto marine bulk holding ships. Citing the quality control exemption above, the reclaim conveyors, belt weigh scales, metal detector, and belt magnet would qualify for the exemption. The outbound conveyor, shiploader feed conveyor, and travelling shiploader conveyor do not perform any quality control or processing functions as described in the ruling request letter, are not used directly in the manufacture of tangible personal property for sale or resale in the industrial sense and, therefore, do not qualify for the manufacturing exemption.
Pollution Control Exemption
Virginia Code § 58.1-609.3 9 provides an exemption from the sales and use tax for “[c]ertified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section.” Virginia Code § 58.1-3660 B then defines certified pollution control equipment and facilities to include “solar energy equipment, facilities, or devices owned or operated by a business that collect, generate, transfer, or store thermal or electric energy whether or not such property has been certified to the Department of Taxation by a state certifying authority.” Virginia’s current state certifying authority for certifying air pollution equipment is the Department of Environmental Quality (DEQ).
Title 23 VAC 10-210-2090 addresses the sales and use tax exemption for pollution control equipment and facilities. Subsection B states that any property that is certified as used primarily for abating or preventing air or water pollution is not subject to the sales and use tax. Pursuant to the regulation, qualifying property includes real or tangible personal property, equipment, facilities or devices used primarily for the purpose of air or water pollution abatement or prevention. Without a certification from DEQ, the Department is unable to conclude whether the equipment listed below is eligible for the pollution control exemption:
• Plant A: Cyclones, Bag Houses, and a Wet Electrostatic Precipitator that removes particulates and pollutants from exhaust discharged back into the environment from the Rotary Dryer.
• Plant B: Fabric Filter Dust Collectors that control particulate emissions during transfers.
This ruling is based on the facts provided as provided by the Taxpayer and summarized above. Any change in facts or the introduction of new facts may lead to a different result. In addition, the eligibility of the various items of property are specific to their use in this Taxpayer’s manufacturing process. The same or similar equipment used in a different process may or may not be eligible for the industrial manufacturing exemption.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at 804.***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/694.Z