95-110 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing; Manufacturing facility equipment

Topic

Taxability of Persons and Transactions

Date Issued

05-09-1995

May 9, 1995

Re: Request for Ruling: Retail Sales and Use Tax

Dear***********

This will reply to your letter of March 29, 1995 in which you request reconsideration of a ruling regarding the application of the retail sales and use tax to certain equipment purchased by ***************(the "Taxpayer") under a contract to construct a facility for***************.

FACTS

The Taxpayer is a general contractor and has entered into an agreement to construct a manufacturing facility in Virginia. Under the agreement, the Taxpayer will purchase items which will be incorporated into the building for manufacturing purposes .

The department previously issued a ruling explaining which items may be purchased exempt of the sales and use tax under Code of Virginia §58.1-609.3(2). As part of that ruling, it was determined that the air conditioning and filtration systems are not used directly in manufacturing and, therefore, do not qualify for the exemption. You have! provided additional information and request reconsideration of the department's position, as well as clarification on the application of the tax to certain electrical components.

RULING

Electrical substations

Electrical substations are exempt from the tax to the extent that the electricity is used to power exempt production machinery or for production line testing.

However, if the power is used for administrative, general lighting, heating or cooling purposes ancillary to production, the electrical substation is subject to the tax. If an electrical substation is used to power both exempt production machinery and nonexempt functions, the preponderance of use test set forth in Virginia Regulation (VR) 630-10-63.D will apply.

Based on the information provided, over 50% of the power supplied by the electrical substation will be used to power the production machinery. If this is in fact the case, the substation may be purchased exempt from tax. Please note that if more than one electrical substation is being installed, the preponderance of use test must be applied to each substation individually and not to all substations collectively.

Bus ducts. power panels and volt feeders

The department previously ruled that the bus ducts and power panels are necessary to connect exempt production equipment with the wiring of the facility and may be purchased exempt of the tax. Furthermore, the department ruled that the 600 volt feeders are a component part of the production of power for production line equipment and, therefore, are used directly in the manufacturing process and qualify for the exemption.

Additional information has been provided indicating that over 50% of the power supplied by the medium voltage feeders (for incoming service) is used to power production machinery. If, in fact, a preponderance of the feeders' use is in exempt production activities, they may be purchased exempt from tax.

Air conditioning and Filtration systems

In its previous ruling, the department found that the air conditioning and filtration systems are not used directly in the actual production process and do not qualify for the manufacturing exemption. The additional information provided states that the air conditioning and filtration systems create a controlled temperature and humidity environment necessary for the production equipment to function at the levels of quality and efficiency to justify construction of the facility.

Code of Virginia §58.1-609.3(2) provides an exemption from the sales and use tax for machinery and tools "used directly" in manufacturing products for sale or resale. The term "used directly" is defined in Code of Virginia §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."

In accordance with the foregoing, Virginia Regulation (VR) 630-10-63 provides that the exemption applies to machinery and tools which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." However, this section continues, "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."

In this case, although the air conditioning and filtration systems may be essential to the maintenance and, in some cases, the operation of the Taxpayer's production equipment, the systems are not an immediate part of the Taxpayer's production process. The systems' function is to maintain a controlled environment to keep production equipment operating at an optimum level of efficiency; the systems are not required for the protection of the product itself. As such, the systems are 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. Accordingly, the air conditioning and filtration systems, used only indirectly in the Taxpayer's production process, do not qualify for the manufacturing exemption.

Because the air conditioning and filtration systems do not qualify for the manufacturing exemption, the concrete tunnels, ductwork and motor control centers used to operate the systems are taxable.

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

OTP/9535F

Rulings of the Tax Commissioner