Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Paper recycling
Topic
Taxability of Persons and Transactions
Date Issued
05-14-1993
May 14, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will reply to your letter of November 24, 1992 in which you seek correction of a retail sales and use tax assessment for (the "Taxpayer").
FACTS
The Taxpayer is a paper recycler, collecting waste paper and selling it to industrial consumers. In its operations, the Taxpayer places containers in various locations in the Commonwealth. After collection, the waste paper is placed in a machine and sorted by taking out "contaminants" not suitable for recycling. The paper is then placed on a conveyor belt and taken to a press, where it is baled and packaged prior to shipment.
The Taxpayer maintains that its operations constitute processing within the meaning of Va. Code §58.1-608(A)(3)(b) and that purchases relating to the operations should be exempt from tax. The auditor assessed tax, believing that the Taxpayer was not engaged in processing, but instead, only made the paper easier for shipment.
The Taxpayer also challenges a portion of the assessment based on the expiration of the statute of limitations.
The issues you raise will be addressed separately.
DETERMINATION
Processing: Va. Code §58.1-608(A)(3)(b)(iii) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts...or supplies used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale." Additionally, Va. Code §58.1-602 defines the term "used directly" as referring "to those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing process." The issue in this case is whether the Taxpayer's operations constitute industrial processing and, therefore, qualify for the exemption.
In Commonwealth of Virginia v. Orange-Madison Cooperative Farm Service, 220 Va. 655, 261 S.E.2d 532 (1980), the Virginia Supreme Court adopted the following definition of "processing":
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- to subject a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result: put through a special process: as... (1) to prepare for market, manufacture, or other use by subjecting to some process... (2) to make usable by special treatment.
- to subject a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result: put through a special process: as... (1) to prepare for market, manufacture, or other use by subjecting to some process... (2) to make usable by special treatment.
Based on the above and the facts presented, I find that the Taxpayer's operations constitute industrial processing. The Taxpayer takes waste paper and runs it through machines to remove "contaminants" (non-recyclable paper) and to compress it. This sorting and baling makes the paper more marketable and useful. Consequently, the machines used to perform the processing functions are exempt from tax.
Because the auditor believed that the processing exemption was not applicable, he did not address the issue of whether certain items were used directly in the industrial process, qualifying for the exemption. You state that some of the items at issue were used directly in processing and have documentation to support this. Therefore, I am referring the audit back to the***********Virginia District Office so that they may review your information and revise the assessment as appropriate.
Statute of Limitations: It appears that a portion of the assessment relates to a period outside the three year statute of limitations for assessments. There is no issue involving fraud in this case, and the Taxpayer filed sales tax returns and reported tax for every month of the audit period. The assessment was based on the belief that the Taxpayer was not an industrial processor. Because the industrial processing exemption is available to the Taxpayer, the portion of the assessment relating to the months from April 1988 to July 1989 (more than three years prior to the assessment date of August 27, 1992) will be removed from the audit.
Accordingly, the assessment will be revised to reflect the above, and the audit will be referred back to the**********Virginia District Office so that they may review your information relating to items used directly in industrial processing. The requested information should be supplied to the auditor within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6590F
Rulings of the Tax Commissioner