July 9, 2024
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you request a refund the Virginia retail sales and use tax for the period October 2018 through November 2020. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, a manufacturer of electronic components used primarily in telecommunications, filed for a refund of sales tax paid on purchases of property it believes is exempt because it was used directly in its manufacturing process. The Department denied the refund request, concluding the property was not used in the manufacturing process, but rather used for testing finished products. The Taxpayer filed an application for correction contesting the denial of the refund.
DETERMINATION
Virginia Code § 58.1-609.3 2 provides an exemption from the sales and use tax for property purchased for direct use in a manufacturing process. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 A provides that the exemption applies to “machinery, tools or repair parts…or supplies used directly in manufacturing or processing.” Title 23 VAC 10-210-920 B defines “used directly” as “those activities that are integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance…” This definition further states that “[t]he integrated manufacturing process…includes the production line of a plant...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 also includes production line testing and quality control.”
With regard to quality control and testing, Title 23 VAC 10-210-920 C 2 explains that “[e]quipment used for production line testing or quality control is classified as exempt production equipment. Testing for the purpose of improving administrative efficiency or any other testing not relating to quality control is taxable.” Consistent with this regulation, the Department has ruled that the manufacturing exemption only applies to testing or quality control activities that occur during the manufacturing process. See Public Document (P.D.) 93-135 (6/4/1993) and P.D. 18-86 (5/16/2018).
The Taxpayer submitted additional information with its appeal indicating it used the equipment for testing, or quality control, during the manufacturing process. Specifically, the documentation indicates that testing occurs before the final stage of assembly. Because the testing is conducted before the product is placed into its housing and labeled, the Taxpayer’s property at issue is used directly in its manufacturing process for quality control and testing during the production process. Therefore, the testing equipment at issue is eligible for the manufacturing exemption and a refund for the sales tax paid on the property will be issued.
The Code of Virginia sections, regulation and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4153.B