Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Air Conditioning Equipment
Topic
Taxability of Persons and Transactions
Date Issued
09-06-1991
September 6, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*******************
This will reply to your letter seeking correction of sales and use tax assessments for*********("the Taxpayer").
FACTS
The Taxpayer is a manufacturer of paper products. An audit of the Taxpayer for the period October, 1986 through September, 1989 produced assessments for its failure to remit the sales and use tax on various untaxed purchases of tangible personal property.
The Taxpayer contests the assessment of tax on the purchase of air conditioning equipment for motor control rooms, contending that the equipment is exempt under Virginia Regulation (VR) 630-10-63 (Manufacturing and processing).
DETERMINATION
Va. Code §58.1-608(A)(3)(b)(iii) 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 ... manufacturing ... products for sale or resale." The term "used directly" is defined in Va. Code §58.1-602 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." (Emphasis added).
Interpreting the above statutes, § B(2) of VR 630-10-63 provides:
-
- Items of tangible personal property which are used directly in manufacturing... are machinery, tools, and repair parts therefor, fuel, 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. Convenient or facilitative items ... or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing ... (Emphasis added).
In addition, § C(2) of the above regulation lists as taxable "[t]angible personal property used for general plant lighting, heating, air conditioning, ventilation, etc., unless such property is specifically designed to protect the integrity of products."
In this case, the temperature in the Taxpayer's manufacturing plant often exceeds the temperature required for proper operation of electronic controls used to run production machinery. As such, the controls are housed within a room specifically designed to provide the proper environmental conditions via use of the air conditioning equipment in question.
Applying the facts in this case to the statutes and regulation cited above, I cannot agree that the air conditioning equipment at issue qualifies for exemption. While the equipment maintains the appropriate temperature in the control room for proper operation of the electronic controls, the air conditioning equipment is not being used directly in the actual production process within the meaning of the above authorities. The equipment is used primarily in the protection of the controls, rather than immediately in the maintenance of a controlled environment required for the protection of the product itself. As such, it merely is convenient or facilitative to production and taxable pursuant to the Virginia Supreme Court's opinions in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E. 2d 619 (1973) and Webster Brick v. Department of Taxation, 219 Va. 81, 245 S.E. 2d 252 (1978). Moreover, the department has consistently held that tangible personal property used to maintain the necessary environment for proper equipment operation is taxable. See Ruling of the Tax Commissioner dated March 19, 1982, copy enclosed.
Based on all of the foregoing, I do not find basis for correction of the assessment
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner