Tax Type
Retail Sales and Use Tax
Description
Woodyard equipment
Topic
Taxability of Persons and Transactions
Date Issued
05-22-1986
May 22, 1986
Re: Request for Ruling/Sales and Use Tax
Dear *********************
This will reply to your letter of March 24, 1986, in which you request a ruling on the application of the sales and use tax to various items used in the manufacturing of products for sale or resale in the industrial sense.
FACTS
*************** (Taxpayer) is a manufacturer of forest products and other products for sale or resale in the industrial sense. The taxpayer requests a ruling on the application of the sales and use tax to three classes of items:
(1) Shipping containers used to transport active carbon produced at the taxpayer's plant to its customers in the automotive and other industries;
(2) Conduit, pipe hangers, conduit trays, and other items used in a plant electrical system; and
(3) Tangible personal property used at woodyards located separately from the taxpayer's plant.
RULING
I will address the three questions raised by the taxpayer on a separate basis below:
Containers for the shipment of carbon
The containers in questions are used to transport products manufacture at the taxpayers carbon plant to customers in tee automotive and other industries. It is my understanding that the containers are returned to the taxpayer by its customers; therefore, the containers do not become the property of the customers.
§ 630-10-26 of the Virginia Retail Sales and Use Tax Regulations provides that "[p]ackaging materials, such as containers, labels, sacks, cans, boxes, drums, bags, and other similar items may be purchased tax exempt by wholesalers and retailers as purchases for resale, if the items are marketed with the product being sold and become the property of the purchaser (Emphasis added). Under this regulation, returnable containers are generally not entitled to an exemption; however, § 58.1-608.1 of the Code of Virginia sets forth an exception applicable only to manufacturers, miners, and processors of products for sale or resale in the industrial sense.
Virginia Code § 58.1-608.1 provides in part that "materials, containers, labels, sacks, cans, boxes, drums or bags for future use packaging tangible personal property for shipment or sale "are exempt from the tax when purchased or leased by industrial manufacturers, miners, and processors. As interpreted by Sales and Use Tax Circular No. 9, published on September 23, 1974, this statute provides an exemption for packaging materials "whether they are returnable or nonreturnable." Therefore, the containers in question here qualify for exemption provided they do not constitute containerized cargo or any of the other items specifically excluded from the exemption in § (A) 2 of Circular No. 9 (copy enclosed).
Conduit, Pipe Hangers, etc.
The items in question are electrical conduit and pipe hangers, conduit trays, electrical cable trays used to support or hold electrical conduit. The conduit is used to furnish electrical power to plant machinery.
Electrical conduit and wiring are considered to be used directly in industrial manufacturing and exempt from the tax under Virginia Code § 58.1-608.1 when constituting part of the wiring of exempt plant machinery. However, conduit and wiring used to provide domestic electrical service to a plant (power for lighting, heat, electrical outlet's for non-manufacturing use, etc.) are not used directly in production and are taxable. f With respect to pipe hangers, cable trays, and other forms of supports, § 630-10-63 of the Virginia Retail Sales and Use Tax Regulations provides that [m]aterials and apparatus used to support production machinery (are taxable)...except supports or legs which are a component part of exempt production machinery and do not become affixed to realty.
Pipe hangers suspended from a ceiling to support electrical conduit used directly in exempt production activities are deemed to be a part of the conduit and are therefore exempt. Of course, pipe hangers that support conduit used in a taxable manner will be taxable. Although similar to pipe hangers m function, cable trays are deemed to be used indirectly in production and taxable as they are not part of electrical wiring or conduit. Rather, wiring or conduit merely rest on the trays.
Outlying Woodyards
The taxpayer operates a number of woodyards away from its plant site. It is my understanding that these yards are operated primarily for the procurement of timber from independent landowners and pulpwood harvesters. Typically, the taxpayer will operate a scale for the weighing of purchased timber and forklifts and other equipment for loading the timber onto rail cars. In addition, the taxpayer may operate a "chipping" machine at the yard through which some of the timber may be run before transportation to the taxpayer's plant for further manufacturing or processing.
Virginia Code § 58.1-602.9 defines the term "manufacturing" to include "the production line of the plant starting with the handling and storage 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." Interpreting this statute, Regulation § 630-1-63.B.2 states that "[t]angible personal property used in activities conducted away from the plant site or used to convey products or materials between two plant sites is deemed not to be used directly."
Based on the foregoing authorities, an outlying woodyard is not part of the taxpayer's plant for purposes of the exemption; however, it may constitute a separate plant site. When used solely for the procurement of timber, no manufacturing or processing takes place in a woodyard and ail tangible personal property used on the site is taxable. On the other hand, running timber through a chipper constitutes an exempt processing activity under Virginia Code § 58.1-602.1, provided that the finished product will ultimately be sold or resold. Accordingly, chippers used at a woodyard for the processing of timber are exempt from the tax. In addition, based upon the "preponderance of use" test set forth in Virginia Code § 58.1-608.1 and Regulation. § 630-10-63.D, equipment and tools used in the handling of raw timber (such as scales used to weigh incoming timber) and to load chipped timber onto rail cars (such as forklifts) will be exempt from the tax if used primarily in exempt processing activities.
In a case such as this, equipment and tools (other than chippers and other items used exclusively in chipping) will be deemed used primarily in processing only if used more than fifty percent of the time in the handling or loading of timber for chipping or chipped timber. For example, if a set of scales is used to weigh all timber procured at a site and only twenty percent of that timber is chipped at the site, the scales will be taxable in full. However, if a forklift is used sixty percent of the time to load chipped wood onto rail cars and forty percent of the time to load unprocessed timber, the forklift will be totally exempt.
I trust that this will answer all of the questions posed in your letter. Please feel free to contact the department if you have any further questions.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner