Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Air Make-Up System
Topic
Taxability of Persons and Transactions
Date Issued
08-13-1991
August 13, 1991
Re: §58.1-1821 Application: Sales and Use Tax
Dear*********************
This will reply to your letter of August 9, 1990 in which you seek relief of sales and use tax assessed to **************(the Taxpayer) for the period of June 1986 through April 1989.
FACTS
The Taxpayer is an HVAC contractor who installed an air make-up system in the finishing room of a local furniture manufacturer. The air make-up system was installed to replace the toxic and flammable air which is exhausted from the finishing room. The air make-up system provides general plant ventilation, while at the same time provides clean filtered air necessary in the furniture finishing process. The Taxpayer was audited and held liable for the use tax on the purchase of the air make-up system. The Taxpayer feels that the air make-up system is exempt due to direct use in the manufacturing process.
DETERMINATION
Va. Code §58.1-608(3)(b) provides an exemption from the sales and use tax for, "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in the processing, manufacturing, refining, mining or conversion of products for sale or resale," (Emphasis added). The term "used directly" is defined under Va. Code §58.1-602 as follows:
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- "Used directly, " when used in relation to manufacturing, processing, refining, or conversion, refers to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration.
In accordance with the above, Virginia Regulation (VR) 630-10-63(B)(2) addresses direct use and provides that the exemption applies to "machinery, tools and repair parts therefor,... which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." (Emphasis added).
In the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. Therefore, an exemption applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of personal property.
As previously established, the air make-up system performs the dual functions of providing clean air for both the furniture finishing process and also for general plant ventilation. There is no question that general plant ventilation is a taxable function, thus making the air make-up system taxable. VR 630-10-63(C)(2) supports this position by stating that taxable items include, "tangible personal property used for general plant lighting, heating, air conditioning, ventilation, etc., unless such property is specifically designed to protect the integrity of products." (Emphasis added). It is my understanding that the system is not specifically designed to protect the integrity of the taxpayer's products as it serves the entire plant, not just the finishing room.
While I agree that the provision of clean air is essential to the furniture finishing process, based on the above and the information provided by the Taxpayer, I feel the primary purpose of the air make-up system is for plant ventilation and not for product quality control. Therefore, I find no basis for correction of the tax assessed on this item.
If you should have any further questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner