Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Structural Steel
Topic
Taxability of Persons and Transactions
Date Issued
08-26-1991
August 26, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter of December 21, 1990 in which you protest a recent sales and use tax assessment of your client, *************(the "Taxpayer"), for the period September 1987 through April 1990.
FACTS
The Taxpayer produces a wide variety of plastic and polymer materials which it sells to manufacturers for use in various manufacturing processes. It was recently audited and found to have failed to pay the tax on fixed asset and expense purchases. The Taxpayer contests the inclusion in the assessment of structural steel purchases as it maintains that such steel is used as a component part of exempt production machinery.
The Taxpayer uses the steel to fabricate "equipment" which, while serving to support the machinery, forms an integral part of the production process. The Taxpayer maintains that the equipment allows the production lines to be configured in different ways for different processes and that without it, the Taxpayer would have to have many duplicate items of equipment and much more space in which to arrange them. The equipment may be mounted on casters, allowed to rest directly on the floor or temporarily bolted to the floor. It, however, is not permanently attached to the realty.
Such items are generally sold by the manufacturer of the process machinery as an integral component of a complete turn-key production line, and their costs are included in the basic price of the machinery, unless the purchasers desire to fabricate their own. The Taxpayer has chosen to fabricate its own as this results in considerable savings.
The Taxpayer protests the inclusion of the steel in the recent audit assessment.
DETERMINATION
Va. Code §58.1-608(3) provides an exemption from the sales and use tax for "machinery or tools or...supplies...used directly in...manufacturing or processing products for sale or resale." (emphasis added) The term "used directly" is defined in Virginia Regulation (VR) 630-10-63 as "those activities that 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, management or administration."
The regulation provides that "[c]onvenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., or 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." Thus, steel supports which are not attached, bolted or welded to exempt machinery are not a component part of such machinery and are taxable. An example of a taxable "convenient" item is a steel platform which is used to support machinery and to provide convenient access for workers.
The regulation further provides that "[s]teel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax." Thus, in those instances where freestanding steel legs or other supporting structures are attached to exempt machinery and used solely to support exempt machinery, and the machinery cannot be operated without such supports, the steel becomes a component part of the machinery and the exemption applies.
The steel under protest was determined by the auditor to fall within the category of items which are essential to the operation of a business but not an immediate part of the actual production, and thus subject to the tax.
Based on the information provided, I am unable to determine whether the steel under protest is used in a taxable or exempt manner. Thus, I am referring this matter back to the ************** District office for a final determination. You should be hearing from them shortly.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner