Tax Type
Retail Sales and Use Tax
Description
Shipbuilding machinery and supplies
Topic
Exemptions
Property Subject to Tax
Date Issued
02-26-1987
February 26, 1987
Re: § 58.1-1821 Application/Sales and Use Tax
Dear ***********************
This will reply to your letter of June 27, 1986, 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 building, repair, and conversion of ships and vessels. A recent audit of the taxpayer produced an assessment for its failure to remit the sales and use tax on purchases of various articles of tangible personal property. The taxpayer contests the assessment of tax on certain such articles, contending that the property is used directly in the production of ships and vessels.
DETERMINATION
In reviewing this matter, it is evident that certain items included in the department's audit are nontaxable in light of my December 28, 1984 ruling to the taxpayer. Accordingly, staging, the caisson gate control panel, the monorail trolley and the crane spreader beam will be removed from the department's audit as such items are used directly in the building or repairing of ships. In addition, I find spud barges and keel blocks to be used directly in exempt production activities, as well as air compressors to the extent used to provide power to pneumatic tools or for production line testing of shipboard pneumatic systems. Similarly, electrical supply systems (transformers, switching gears, etc.) are exempt from the tax to the extent that electricity supplied is used to power production machinery or for Production line testing of shipboard systems.
I will now address the other specific items contested by the taxpayer:
Motor control center and synchronous motor controllers: These devices function as controls for a 900 horsepower motor, which pumps water through a nuclear ship's reactor cooling system. It is not noted by the taxpayer whether the water pumped by the motor is used directly in the testing of shipboard nuclear systems, however. If the motor is indeed used in such a manner, the controls in this case would be exempt pursuant to §58.1-602.9 of the Code of Virginia, which includes "equipment and supplies used for production line testing and quality control" within the definition of exempt "manufacturing".
However, if the motor merely pumps water through nuclear systems for the purpose of keeping the systems in operating order, the exemption does not apply to the controls. In such a case, the motors and controls are not used in production at all, but merely are convenient or facilitative to production and taxable pursuant to the Virginia Supreme Court's opinion in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973). In addition, such "general maintenance" of nuclear systems is specifically included from the definition of "used directly" set forth in §58.1-602.22 of the Code of Virginia.
Deionized Water Treatment System: This system is used for the processing of demineralized water, which in turn is used in the testing of shipboard nuclear systems. Provided that the testing of nuclear systems is in connection with the production, repair, or conversion of vessels and is not in the nature of the routine operation or general maintenance of the systems, the water treatment system is exempt due to its use in production line testing and quality control. In the event that the system is used both in exempt production line testing and taxable general maintenance activities, the preponderance of use test set forth in Virginia Regulation 630-10-63.D will apply on and after July 1, 1984.
High Speed Plotter: This machine translates design drawings into patterns which are then translated onto computer cards used to program automatic burning machines.
The definition of "manufacturing" set forth in §58.1-602.9 of the Code of Virginia "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." Emphasis added
Under the above definition, the exemption is limited only to production line activities. In this case, the high speed plotter is not used on the production line, but is used in preproduction activities. Furthermore, the high speed plotter does not direct production activities so as to be exempt pursuant to Virginia Regulation 630-10-63.C.2; rather, it produces computer cards which are in turn used to program other burning machines which are used directly in production.
Moulder: This device is used primarily to cut plugs for hull fittings of ships in dry dock. Provided that the moulder is used over 50 percent of the time in cutting fittings for use directly in the fabrication of items that will become affixed to a ship or vessel under construction, repair, or conversion, the exemption will apply.
Forklift: The forklift in question is used to receive and store raw materials at a warehouse located off of the taxpayer's main plant site. The warehouse in this instance is separated from the main plant site by one city block, but is located on the same rail line that serves the main plant site.
Despite the proximity of the warehouse to the taxpayer's plant site, 1 must deem the forklift to be subject to the tax pursuant to the definition of "manufacturing" set forth in §58.1-602.9 of the Code of Virginia. Interpreting this statute, Virginia Regulation §630-10-63.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 (in exempt production activities)."
Diesel Generators: These generators are used to Provide emergency power to piers and the nuclear refueling production area. It is not stated, however, whether the generators are necessary to operate equipment used directly in production activities in the case of electrical outages or other emergencies. If not and the generators are used merely to provide electrical supply for nonproduction activities or to provide general lighting, ventilation, etc., then the tax applies pursuant to Virginia Regulation 630-10-63.C.2.
Woodworking and Mock Up Department: The production in this department of items that will become a part of ships or vessels under construction, repair, or conversion is an exempt production activity. Furthermore, the production of mock-ups for use directly in the fabrication of items that will become affixed to a ship or vessel under construction, repair, or conversion constitutes an exempt activity. However, other activities of this department may not be exempt in nature; thus, the preponderance of use test will apply.
Research and Development Computer Equipment: The computer in question is used in conducting research into submarine noise modeling. As such, the application of the tax will be governed by §58.1-608.19 of the Code of Virginia and Virginia Regulation 630-10-92. The above referenced statute provides an exemption for "[t]angible personal property purchased for use or consumption directly and exclusively in basic research or research and development in the experimental or laboratory sense." As noted in the regulation; however, not all research activities are exempt.
In general, Virginia Regulation 630-10-92 provides that in order to qualify for the exemption an activity must have as its ultimate goal the advancement of knowledge or technology in a scientific or technical field or the development of new products, the improvement of existing products, or the development of new uses for existing products. If the research project in question meets one of these criteria and the computer is used directly and exclusively in the research project, the exemption will apply.
Consumable Materials: It is my understanding that some consumable items, a portion of which were taxed in audit, were used exclusively in exempt production activities. If this can be demonstrated by the taxpayer and the taxpayer will identify the classes of items so used, they will be removed from the portion of the audit dealing with consumable goods.
Lead Control Consumables: These items consist primarily of protective devices furnished to production personnel who work with lead. Accordingly, these items will be removed from portion of the audit dealing with consumable goods as such devices are exempt from the tax pursuant to Virginia Regulation 630-10-63.C.2.
Vapor Spray Degreaser: This device is used to remove grease, film, etc., from valves and other ship machinery in preparation for machine shop work. Provided that this is used on the production line to remove grease, film, etc., from machinery so that the machinery can be repaired, I find basis for exemption under my December 28, 1984 ruling to the taxpayer. It was noted in that ruling that ship repair is an exempt industrial activity as the activity is included within code 3731 of the Standard Industrial Classification Manual.
I trust that this will answer the questions raised in your appeal. Based upon the policies set forth in this letter, I am asking the department's Technical Services Section and ******** District Office to review the taxpayer's audit and make any necessary changes. It is possible, however, that some additional information may be required from the taxpayer in order to complete the necessary revisions. In any event, we will complete the necessary revisions as soon as practicable and issue a revised Notice of Assessment to the taxpayer.
If you have any further questions on the issues raised in this appeal, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner