Which contested plant items qualified for Virginia's manufacturing exemption: a continuously applied biocide chemical or an intermittently used winch?

Subject

Certain items do not qualify for the manufacturing exemption

Plain-English summary

After a plant tour, Virginia reconsidered two items under the manufacturing exemption. CL207 biocide was continuously pumped through production formers, became part of the product, and prevented biological growth on machinery and the finished product. It qualified and was removed from the assessment.

An electric winch used only when the pulper's own remover could not clear wire or contaminants remained taxable. It was separate from the pulper and used intermittently to clear jams, not directly in manufacturing. Virginia declined to consider Imunol S6 because the taxpayer had not raised it in the original appeal.

What this means for you

• Chemicals continuously applied to prevent product contamination can be direct manufacturing inputs.
• Equipment used intermittently to clear jams may be treated as maintenance rather than immediate production machinery.
• Raise all disputed items in the original administrative appeal; a reconsideration request may not open a new issue.

Common questions

Why did the biocide qualify?

It continuously moved through the formers, protected product integrity, and actually became part of the product.

Why did the winch fail?

It was a separate device used only when excessive contaminants jammed the pulper, so Virginia did not view it as directly used in production.

Citations and references

• Va. Code § 58.1-609.3(2), manufacturing exemption applied to the contested items.
• P.D. 85-208, analogous treatment of chemicals indispensable to product-quality control.
• P.D. 92-65, P.D. 93-238, and P.D. 02-62, contamination-prevention chemicals cited by Virginia.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-113

Original ruling text

July 19, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek a reconsideration of the Department's prior determination issued to * (the "Taxpayer") regarding the sales and use tax assessment issued for the period October 2001 through October 2004.

FACTS

In the Department's prior letter, it was determined that certain items used in the manufacturing facility did not qualify for the industrial manufacturing exemption. Based on the facts presented at that time, the Department determined that certain items did not qualify for the manufacturing exemption set out in Va. Code § 58.1-609.3 2.

The Taxpayer disagrees with the Department's position on the basis that the items are used directly in manufacturing as required under the manufacturing exemption. Department personnel toured the Taxpayer's plant to further determine the taxable status of the contested items.

DETERMINATION

Based on the provisions of Va. Code § 58.1-609.3 2 and the observations from the Department tour of the Taxpayer's plant, I will address the application of the retail sales and use tax to the CL207 Biocide Chemical and the McMaster Carr Ragger Winch.

CL207 Biocide Chemical

The CL207 biocide chemical is a chlorine-based cleaner that is used to prevent biological growth in the formers and to prevent biological growth on the final product. The chemical is continuously pumped through the formers, applying a layer of biocide chemical to the product.

The chemicals used to prevent biological growth in this case are analogous to the corrosion chemicals addressed in Public Document (P.D.) 85-208 (10/31/85). In that case, the corrosion chemicals used in an oil refinery were an indispensable part of the quality control of the manufacturing process and not subject to sales tax. In this case, the chemicals are used to prevent the formation of bacteria on the production machinery and to protect the integrity of the product. The CL207 Biocide Chemical actually becomes a part of the product and protects the integrity of the product. Accordingly, the CL207 Biocide Chemical qualifies for the manufacturing exemption, and will be removed from the assessment. This determination is consistent with P.D. 92-65 (5/11/92), P.D. 93-238 (12/21/93) and P.D. 02-62 (4/22/02), in which the Department ruled that chemicals used to protect the integrity of products by preventing the contamination of those products are deemed exempt from retail sales and use tax.

McMaster Carr Ragger Winch

The electric winch is used to support the filler pulper machine. The winch assists in removing bailing wire and other contaminants from the pulper machine when the self-contained remover cannot handle the amount of contaminants. The winch is separate from the pulper machine and is not used on a continuous basis.

Based on the information provided in your letter and during my staff's tour of the Taxpayer's plant, I cannot agree that the electric cable winch qualifies for the manufacturing exemption under Va. Code § 58.1-609.3 2. The winch is used intermittently to pull jammed materials from the pulper machine. The winch is not used directly in manufacturing and is properly included in the audit.

Imunol S6

The taxability of Imunol S6 was not raised as an issue in the Taxpayer's original appeal and was not addressed in the Department's prior determination. The Taxpayer may not raise this issue in a request for reconsideration.

CONCLUSION

Based on this determination, the CL207 Biocide Chemical will be removed from the assessment. The other contested transactions will remain in the assessment. An updated bill with interest accrued to date will be sent to the Taxpayer. No further interest will accrue provided the bill is paid within 30 days from the date of the undated bill.

The Code of Virginia section and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1160261449.i