Tax Type
Retail Sales and Use Tax
Description
Manufacturing monitoring equipment
Topic
Exemptions
Date Issued
08-26-1988
August 26, 1988
Re: Va. Code §58.1-1821 Application/Retail Sales and Use Tax
Dear*********************
This will reply to your letter of July 14, 1988, seeking the correction of an assessment issued in the above referenced case for the period March 1984, through December 1986.
FACTS
**************** ("The Taxpayer") is a manufacturer and retailer/wholesaler of interior building products with plants and offices located throughout the world. The Taxpayer's activities in the Commonwealth of Virginia are limited to a yarn spinning/heat setting operation and a wholesale sales operation of its products made from locations outside the Commonwealth.
The Taxpayer contests the disallowance of cash discount allowances taken and protests the assessment of tax on certain monitoring systems.
DETERMINATION
Virginia Code §58.1-602(17) states that "[s]ales price shall not include...any cash discounts allowed and taken. " Interpreting this section, Virginia Retail Sales and Use Tax Regulations § 630-10-18 provides:
-
- Cash and trade discounts taken on sales are not includible in the sales price for purposes of computing the tax.... The amount of such discounts may be deducted from gross sales provided the discounts have been included in gross sales.... In computing the amount of a discount which may be subtracted from gross sales, the discount must be allocated between sales price and sales tax. (Emphasis added).
- Cash and trade discounts taken on sales are not includible in the sales price for purposes of computing the tax.... The amount of such discounts may be deducted from gross sales provided the discounts have been included in gross sales.... In computing the amount of a discount which may be subtracted from gross sales, the discount must be allocated between sales price and sales tax. (Emphasis added).
The Taxpayer contends that its procedure is fair and equitable and also that it would be an administrative burden to track actual cash discounts. Based upon the regulation and statute cited above, we cannot agree. However, for purposes of this assessment, the Department will allow seventy-five percent of the cash discounts taken by the Taxpayer since there is evidence that the Taxpayer gave such discounts to Virginia customers.
The Taxpayer should take the necessary steps to ensure that cash discounts are properly reported pursuant to Regulations §630-10-18, (copy enclosed). If you have any questions regarding the acceptability of your reporting procedures, we will be happy to review them.
With respect to the monitoring equipment, §58.1-608(1) of the Virginia Code provides an exemption from the sales and use tax for "machinery...used directly in...manufacturing...products for resale." The term "used directly" is defined in Va. Code §58.1-602(22), 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." The term "manufacturing" is defined in Va. Code §58.1-602(9), as including "equipment and supplies used for production line testing and quality control. "
The energy monitoring system, a data pro unit, and a steam flow monitoring system were included in the assessment based upon statements from the plant manager that such items were used for record keeping purposes. As stated above, activities such as administration (record keeping) do not qualify for the manufacturing exemption. From a further investigation by the Department, the systems are not used for record keeping purposes but are used in the manufacturing process.
The energy monitoring system is used to measure steam and water pressure for heat setting, the process which gives yarn its durability and strength. Yarn must be heat set in order to be used to make carpet. The only way to heat set yarn at this particular plant is by controlling steam pressure, water pressure, air temperature, and steam temperature. Any deviation in the heat set will make the yarn unusable. Therefore, if the energy monitoring system fails, the steam and water pressure will not be at proper levels and the yarn will be defective.
The data pro unit is used in connection with the energy monitoring system in that it measures and records heat (air temperature) that is being applied to the yarn. If proper levels of heat are not applied, the yarn will not be heat set properly. When the temperature is not at correct levels, the unit will sound an alarm and an operator must shut down the production line and make adjustments to control the air temperature.
The steam flow monitoring system regulates the steam temperature being applied to the yarn. As with the above systems, if the steam temperature (as compared to steam pressure) is not correctly maintained by the steam flow system, the yarn will be defective.
Based on the foregoing, I find that the above monitoring systems are used directly in manufacturing and are an integral and indispensable part of the production of yarn; therefore, they qualify for the manufacturing exemption Under Va. Code §58.1-608(1).
The audit will be adjusted accordingly and we will issue a revised Notice of Assessment.
If you have any further questions, please let us know.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner