Tax Type
Retail Sales and Use Tax
Description
Virginia Retail Sales and Use Tax Regulation 1-63
Topic
Reports
Date Issued
05-01-1984
May 1, 1984
Virginia Retail Sales and Use Tax Regulation 1-63
SUBJECT: Manufacturing, processing, refining, and converting
EFFECTIVE DATE: November 15, 1983. Under the authority of Virginia Code
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- § 58-48.6(8), this regulation is retroactive.
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EXPIRATION DATE: N/A
SUPERSEDES:
This regulation supersedes § 1-63 of the Virginia Retail Sales and Use Tax Regulations published January 1, 1979.
REFERENCE:
1. § 58-441.3(p), Code of Virginia
2. § 58-441.3(q), Code of Virginia
3. § 58-441.6, Code of Virginia
4. § 58-441.6(k), Code of Virginia
5. § 58-441.6(q), Code of Virginia
6. § 58-441.6(ff), Code of Virginia
7. § 58-441.6(hh), Code of Virginia
AUTHORITY:
1. § 58-48, Code of Virginia
SCOPE:
Applicable to all manufacturers, processors, refiners, and converters, of tangible personal property for resale.
PURPOSE:
This regulation set forth the sales and use tax application to manufacturers, processors, refiners, and converters, of tangible personal property for resale.
P. D. 84-53
REGULATION:
§ 1-63. Manufacturing, processing, refining, converting. The tax does not apply to:
(a) 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;
(b) Industrial materials that are coated upon or impregnated into the product at any stage of its manufacture, processing, refining or conversion for resale;
(c) Machinery, tools or repair parts, fuel, power, energy, or supplies used directly in manufacturing, processing, refining, mining or converting products for sale or resale;
(d) Materials, containers, labels, sacks, cans, boxes, drums or bag for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable);
(e) Tangible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense;
(f) Gas, electricity or water received through mains, lines or pipes;
(g) Tangible personal property used directly in those necessary ancillary activities of newspaper and magazine printing when such activities are performed by the publisher of any newspaper or magazine for sale daily or regularly at average intervals not exceeding three months and effective July 1, 1982, any newspaper or magazine for distribution of no cost daily or regularly at average intervals not exceeding three months.
The term "used directly" in (c) and (g) above, when used in relation to manufacturing, processing, refining or conversion, refers to those activities that are an integral part of the production of a product, including all steps of an integral part of the production of a product, but not including ancillary activities such as general maintenance or administration. The exemption does not apply to materials to be incorporated into real estate construction.
The activities involved in manufacturing, processing, refining, and converting are divided into "administration," "production" and "distribution."
"Administration" includes all administrative work, such as sales production, general office and collection; clerical work in production, such as preparation of work records, production records and time records; purchasing, transporting, receiving and testing of raw materials prior to production.
"Production" includes 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. Equipment and supplies used for production line testing and quality control are classified as production items.
"Distribution" includes all operations subsequent to production, such as storing, displaying, selling, loading and shipping finished products.
The sales and use tax does not apply to tangible personal property used or consumed directly in the production of tangible personal property for sale as defined above. Since purchases qualifying for the production exemptions must be used or consumed directly in producing tangible personal property for sale, these exemptions do not apply if the property produced by the purchaser is intended for his own use.
The sales and use tax does apply to all property used in the administration and distribution functions as designated above. In addition, the expenditures concerned with general maintenance, heating and illumination of plant and office buildings are taxable since these functions are only indirectly involved in production. Likewise, machinery and tools used to repair and maintain machinery and tools used directly in production are taxable.
The sales and use tax does apply to tangible personal property such as truck bodies and trailers, tank cars and freight cars, ships and vessels, containerized cargo and any other items of similar nature purchased or leased for one's own use and not for sale or lease. Sales of coal, coke, fuel, oil, etc., to a manufacturer, processor, refiner, converter or mine operator are not subject to tax if used to generate power or for processing products for sale or where a controlled temperature and/or humidity is necessary for the production of tangible personal property for sale. However, sales of coal, fuel oil, etc., are subject to tax when used for heating or lighting purposes.
In the case of saw-milling or a like operation, production (manufacturing or processing) starts at the mill and not in the forest. Machinery and tools, in order to be qualified as exempt, must be used directly in manufacturing or processing products for sale or resale. For harvesters of forest products, see § 1-45.1.
Safety apparel and protective materials will be deemed to be used directly in production where furnished gratuitously by the employer to the production employee. Employers may purchase such items by issuing a certificate of exemption. If an employer sells safety apparel to his employees, the tax must be collected.
In making purchases for use in production, a manufacturer, processor, refiner, or converter should furnish his vendors with the applicable certificate of exemption. However, these certificates should not be utilized in making purchases for use in administration, maintenance of plant or building, or distribution. The tax must be paid on purchases for these purposes even when a vendor is holding blanket certificates of exemption filed by the vendor. If a manufacturer, processor, refiner, or converter gives a certificate of exemption and then consumes some of the property purchased for purposes other than production, he must report as taxable receipts the cost to him of the property consumed in administration, maintenance of building or plant, or distribution. A manufacturer may also apply for a direct payment permit (see § 1-23) when it is not possible at the time tangible personal property is purchased to know how it will be used. When such a permit is issued by the Department of Taxation, a manufacturer may file copies of the permit with vendors and pay directly to the department any tax that is due based on the use made of the purchases. No such permit, however, can be issued unless it is conditioned upon an arrangement under which no county or city will suffer the loss of any local sales or use tax revenue by reason of the issuance of the permit. Section revised 5/84.
Rulings of the Tax Commissioner