Tax Type
Retail Sales and Use Tax
Description
Soot blowers; Boiler chemicals; Manufacturing
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
07-02-1987
July 2, 1987
Re: §58.1-1821 Application/ Sales and Use Tax
Dear ********************
This will reply to your letter of March 3, 1987 seeking correction of an assessment in the above referenced case, on behalf of ********** (taxpayer) for the audit period November, 1983 through July, 1986.
FACTS
In connection with its paperboard manufacturing division, the taxpayer was audited and held liable for the sales and use tax on its purchases of certain soot blowers, (motor driven steam atomizing devices), the soot blower control portion of an energy management system, and on certain sonic cleaners.
According to the taxpayer, the soot blowers are necessary to prevent the build up of sodium sulfate on the heating elements of its recovery boiler. In addition, the blowers prevent overheating and structural failure of boiler tubes and other components and optimize boiler performance by preventing the build up of flue gas pressure in its boiler furnace. The soot blower control system monitors the performance of thirty blowers in its recovery boiler and an equal number in its power boiler. According to the taxpayer, both the soot blowers and the soot blower control system are an integral part of its recovery boiler system and the proper control and operation of its entire facility would not be possible without these components.
In addition, the taxpayer was assessed the tax on certain sonic cleaners which perform the same function as the soot blowers, but in less confined spaces. The taxpayer contends that each of the items described above should qualify for exemption from the tax under §58.1-608(1) of the Virginia Code since they are used "in the flow stream" of its manufacturing operation and are vital to the existence of its entire operation.
Section 58.1-608(1) of the Virginia Code provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, etc...of products for sale or resale." (Emphasis added) §58.1-602(22) of the Code defines "used directly" 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."
In accordance with the foregoing, §630-10-63(B) of the Virginia Retail Sales and Use Tax Regulations provides that the exemption applies to "machinery, tools, and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." However, this section continues, "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."
In addition, in the case of Webster Brick Company, Inc.. v. Department of Taxation, 219 Va. 81, (1978) the Virginia Supreme Court upheld the application of the sales and use tax to certain chemicals used in connection with the maintenance and smooth operation of a boiler stating that while such chemicals were essential to the taxpayer's brick manufacturing process they were not an immediate part of actual production.
Similarly, while the blowers and cleaners are essential to the maintenance and smooth functioning of the taxpayer's boiler system, such items are not an immediate part of the taxpayer's production process. Rather, such items are used by the taxpayer to keep its boilers operating at their optimum level of energy efficiency and to prevent the clogging or possible breakdown of its boiler system. Therefore, these items are used only indirectly in the taxpayer's production process.
Notwithstanding the foregoing, if the taxpayer can provide the department within 60 days of the date of this letter, certification from the State Water or Air Pollution Control Board that its blower system and cleaners are used primarily for the abatement or prevention of pollution, I will agree to the removal of such items from the audit. If such certification is not received by the department within this time period, the balance of the audit assessment will become due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner