Tax Type
Retail Sales and Use Tax
Description
Pollution control and cleanup equipment; Leak detection system
Topic
Taxability of Persons and Transactions
Date Issued
11-08-1996
November 8, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
In your letter, you seek correction of the retail sales and use tax audit assessment issued to *************(the Taxpayer). I apologize for the delay in responding to your letter. Copies of all references are enclosed.
FACTS
The Taxpayer is a box manufacturer. An audit for the period July 1992 through May 1995 resulted in an assessment of tax on certain untaxed sales and purchases.
The Taxpayer takes exception to certain sales and purchases of tangible personal property held taxable in the audit and maintains that they are exempt items used directly in the manufacturing process. The Taxpayer also takes exception to certain other sales held taxable and maintains that the purchasers qualify for exemption from the tax even though valid exemption certificates were not received. In addition, the Taxpayer takes exception to the leak detection system held taxable and maintains that this item qualifies for the certified pollution control exemption.
DETERMINATION
Code of Virginia § 58.1-603 imposes the retail sales tax upon the gross sales price of each item or article of tangible personal property when sold at retail or distributed in Virginia. Code of Virginia § 58.1-602 defines the term "sale" as "any transfer of title or possession...of tangible personal property...for a consideration...." [Emphasis added.] This statute also defines the terms "retail sale" and "sale at retail" as a sale to any person for any purpose other than for resale in the form of tangible personal property...." Accordingly, a retail sale occurs when title to, or possession of, goods transfers to the final purchaser for a consideration.
Code of Virginia § 58.1-603 also imposes the sales tax upon the cost price of tangible personal property stored in Virginia for use or consumption in Virginia. Code of Virginia § 58.1-602 defines "storage" to mean "any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than sale at retail in the regular course of business." This statute also defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof..." Accordingly, the purchaser is considered to have made a taxable use, consumption or storage of property when it becomes entitled, at the time of purchase of the property in Virginia, to exercise its rights of ownership over the property while the property is in Virginia. An example would be when a purchaser decides to store or keep the property in Virginia after the goods have been purchased.
Sale of Printing and Cutting Dies
In manufacturing boxes, the Taxpayer uses dies for cutting corrugated sheets to a customer's specifications and imprinting the boxes with the customer's logo. When dies are not furnished by customers, the Taxpayer will order and purchase dies from a die maker. In such instances, it is the Taxpayer's standard policy to have the customer pay for the first set of dies. The Taxpayer does not charge its customers for the cost of replacement dies. The Taxpayer maintains that the dies are not subject to sales and use taxation because the dies remain at the Taxpayer's plant in Virginia and are used directly in the Taxpayer's manufacturing process.
It is my understanding that customers are entitled to take physical possession of the dies if they so choose. In effect, the customer gains legal control over, or title to, the property once the customer has been charged for the dies and pays the bill. Accordingly, the charge made by the Taxpayer for the dies constitutes the retail sale of tangible personal property as the customer does not pay for the dies for the purpose of reselling them. Since the customer decides to keep the dies at the Taxpayer's plant in Virginia, I must conclude from the facts presented that the customers make a taxable use, consumption or storage of the dies in Virginia.
Sales Without Valid Exemption Certificates
The Taxpayer considers certain purchasers to qualify for exemption from the tax on their purchases even though the exemption certificate received by the Taxpayer was incomplete (lacked the certificate of registration number) or the proper exemption certificates were not retained by the Taxpayer.
The department's policy with regard to certificates of exemption is set out by Virginia Regulation 630-10-20 which provides, in part, the following:
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- All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Before accepting an exemption certificate, the Taxpayer must ensure that the certificate has been completed in full, signed and dated. For resale exemption certificates (Form ST-10), the certificate of registration number issued to the purchaser by the Department of Taxation for the collection and remittance of the retail sales tax must be indicated on the face of the certificate. Other tax registration numbers issued by this department or any other state agency for consumer use tax, income tax withholding, corporate income tax, etc. are not acceptable for use on the resale exemption certificate. Nor are federal employer identification numbers to be used on the resale exemption certificate.
In this case, it is my understanding that the Taxpayer accepted a resale exemption certificate without the purchaser's certificate of registration number. As the exemption certificate was incomplete, it was never acceptable or valid. Accordingly, I cannot consider the exemption certificate accepted in good faith.
In those instances in which the Taxpayer failed to maintain the purchasers' exemption certificates, the Taxpayer cannot establish or prove that the tax does not apply to the sales made to those purchasers. As provided in Virginia Regulation 630-10-30, the Taxpayer is required to maintain for three years all exemption certificates furnished by purchasers in order to prove that the tax does not apply. In the absence of exemption certificates taken at the time of, or prior to, the sale, I find no basis to remove such sales from the audit.
Purchases of Box Samples
The Taxpayer maintains that its purchases of box or proof samples are used for quality control purposes related to the manufacture of boxes and thus qualify for the industrial manufacturing exemption.
Interpreting the definition of the terms "manufacturing or processing" set out Code of Virginia § 58.1-602, Virginia Regulation 630-10-63(B)(2) sets out that the integrated manufacturing process includes:
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- the production line of a plant, factory, mill, etc., starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale and conveyed to a warehouse at the same plant site, and also includes production line testing and quality control. [Emphasis added.]
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- This same regulation further provides that:
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- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, 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 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.... [Emphasis added.]
Before the mass production of the Taxpayer's product occurs, the Taxpayer must obtain final approval of the box design from its customer. The Taxpayer purchases a box or proof sample from the die supplier and gives the sample to its customer to determine whether the die and the die design are acceptable for use in production of the Taxpayer's product or must be rejected due to defects.
As provided in P. D. 96-278 (10/15/96), it has been the consistent policy of the department that the industrial manufacturing exemption does not extend to items used in pre-production or post-production quality control activities. Although the box or proof samples are needed to ensure that the items to be produced meet customer's specifications, such samples are not used as an immediate part of the actual production process. Accordingly, the Taxpayer's purchases of box or proof samples are taxable.
Purchase of Pollution Control Devices
The Taxpayer maintains that its purchase of a leak detection system used for underground fuel storage tanks qualifies for the certified pollution control exemption.
As set out in Virginia Regulation 630-10-63(C)(2), the industrial manufacturing exemption does not extend to fuel storage tanks or equipment used for pollution control or abatement purposes unless designated as certified pollution control equipment under the provisions of Code of Virginia § 58.1-3660.
Code of Virginia § 58.1-609.3(9)(i) provides an exemption from the retail sales and use tax for "[c]ertified pollution control equipment and facilities as defined in § 58.1--3660." Code of Virginia § 58.1-3660(B) defines "certified pollution control equipment and facilities" as meaning:
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- any property, including real or personal property, equipment, facilities, or devices, used primarily for the purpose of abating or preventing pollution of the atmosphere or waters of the Commonwealth and which the state certifying authority having jurisdiction with respect to such property has certified to the Department of Taxation as having been constructed, reconstructed, erected, or acquired in conformity with the state program or requirements for abatement or control of water or atmospheric pollution or contamination. [Emphasis added.]
The "state certifying authority" referred to above is the Virginia Department of Environmental Quality (DEQ). Accordingly, the exemption set forth above is not applicable until the property for which such exemption is sought has been certified by DEQ as used primarily for abating or preventing pollution.
At the time that the audit was concluded, it was the auditor's understanding that the Taxpayer was in the process of applying to DEQ for the proper certification on the leak detection system. Based on a recent conversation with a representative of the Taxpayer, the auditor informs me that the Taxpayer has not applied for and thus has not obtained the required certification from DEQ to show that the above exemption applies to the equipment in question. In the absence of such certification, and although the leak detection system may have been purchased to meet some pollution detection requirement of DEQ, the Taxpayer has not presented the proper certification to exempt the purchase of the leak detection system from the tax. Without the proper certification, I have no choice but to uphold the tax assessed on the leak detection system.
Based on the documentation provided, the assessment is correct as issued. Under separate cover, the Taxpayer will receive an updated bill for the total amount of********** with interest accrued through ******. The payment along with the updated bill should be sent to the Department of Taxation, ATTN:*********Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 60 days.
If the Taxpayer can produce DEQ certification within the three year statute of limitations period from the date of purchase, the department will issue the appropriate refund. Since the leak detection system was purchased in January 1994, the Taxpayer has until February 20, 1997, to provide the appropriate DEQ certification to the department's *********District Office.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10802R
Rulings of the Tax Commissioner