Tax Type
Retail Sales and Use Tax
Description
Automatic lubrication system; Chart paper; Manufacturing
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
06-24-1987
June 24, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear ******************
This will reply to your letter of March 2, 1987, in which you submit an application for correction of sales and use tax assessed to **************as the result of a recent audit.
FACTS
Taxpayer) is engaged in the manufacturing of *********** A recent audit of the taxpayer produced an assessment for its failure to remit the sales and use tax on chart paper used to record production data and automatic lubrication systems installed on production machinery.
The taxpayer contests the assessment of tax on chart paper on the basis that the paper is used in exempt production line quality control activities. The tax assessed on the taxpayer's lubrication systems is contested on the basis that the systems are used directly in the manufacturing of ******************.
DETERMINATION
§58.1-608.1 of the Code of Virginia exempts from the sales and use tax various tangible personal property used directly in the manufacturing of products for sale or resale, including "equipment and supplies used for production line testing and quality control" as is noted in §58.1-602.9 of the Code of Virginia. The term "used directly" is defined in §58.1-602.22 of the Code of Virginia as "those activities which 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."
Following is the application of the tax to the items contested in the taxpayer's appeal:
Chart Paper
The chart paper in question is used in recording devices mounted on production machinery. Recorded on the chart paper is data relating to the production machinery itself, including temperature, pressure, etc. The charts are checked periodically by machine operators and daily by quality control personnel in order to determine if any abnormalities occurred in the production process that might have caused defective units to be produced.
Although the chart paper in question is used in a quality control activity, this alone does not answer the question. §58.1-608.1 of the Code of Virginia requires direct usage in the manufacturing process in order for the exemption to apply. In this case, the chart paper is not used directly in production line testing and quality control, but is secondary to the quality control process. The chart paper plays a secondary role inasmuch as it is not used in the actual testing of products on the assembly line. Rather, the chart paper is merely used to record data on the production machinery. As such, I do not find basis for removal of the chart paper from the department's audit.
Automatic Lubrication Systems
As noted above, "general maintenance" is excluded from the statutory definition of "used directly." Thus, maintenance that is of a routine nature, such as the periodic lubrication of equipment, does not fall within the scope of the industrial manufacturing exemption. In such cases, the maintenance activities touch only indirectly on production of products by an industrial manufacturer. In this case, however, the automatic lubrication systems utilized by the taxpayer play a more direct role in the production of products.
An automatic lubrication system is mounted on each ******* curing press at the taxpayer's plant. Each time the press opens, which is every time that a ************** is cured, the system automatically squirts grease on the moving parts of the press. As such, the lubrication of the press is an active part of the production process, thus entitling the automatic lubrication systems to the direct use exemption.
Based on the foregoing, the department's audit will be revised to delete automatic lubrication systems; however, the tax and interest on the chart paper included in the audit will remain due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner