Was a chemical used to clean paper-mill calendar rollers between production runs exempt as a manufacturing supply?

Subject

Immunol used in the Taxpayer's paper manufacturing process is taxable

Plain-English summary

Virginia ruled that Immunol S6 used to clean a paper mill's calendar-stack rollers was taxable. The chemical was used before or after paper processing, not while paper was actually moving through production.

The rollers compressed and smoothed paper, and dirt on them could mark the final product. Even so, the manufacturing exemption was limited to property used immediately and directly in production. General maintenance was excluded.

The Commissioner compared the facts with an earlier ruling involving blanket wash for printing rollers. A cleaning agent used during production could qualify, but cleaning before or after a run was maintenance. Because the paper manufacturer used Immunol only when paper was not being processed, its quality-protection role did not make it exempt.

What this means for you

• The timing of a consumable's use can determine whether it is production or maintenance.
• Protecting product quality is not enough when the item is used only between production runs.
• Document whether a chemical is consumed while the line is operating or during shutdown and cleanup.
• Virginia construed the word "directly" narrowly in the manufacturing exemption applied here.

Common questions

Did Immunol become part of the paper? No. The ruling says it did not become part of the final product.

Would dirty rollers have harmed product quality? Yes, but the chemical was still taxable because its use occurred outside actual production.

Could a roller-cleaning chemical ever be exempt? The ruling cites prior guidance treating a cleaning agent used during production differently from one used before or after a run.

Citations and references

• Va. Code § 58.1-609.3(2) and § 58.1-602.
• 23 VAC 10-210-920.
• Commonwealth v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973).
• P.D. 01-205 (December 7, 2001).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-168

Original ruling text

November 7, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will supplement the reconsideration letter issued to * (the "Taxpayer") regarding the sales and use tax assessment issued for the period October 2001 through October 2004.

FACTS

The Taxpayer requests a ruling on the application of the sales and use tax to a chemical, Immunol S6 (Immunol), used in the Taxpayer's paper mill manufacturing process.

The Immunol is used to clean the calendar stacks that smooth the paper by compressing it between two large metal rollers. If the calendar stack rollers are not cleaned, the rollers will impress dirt and other contaminants on the final paper product. The Immunol is used when the paper is not being processed. The chemical does not become a part of the final product; however, you indicate that failure to use the chemical would result in poor product quality.

RULING

Virginia Code § 58.1-609.3 2 provides an exemption from the sales and use tax for tangible personal property 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 . . . but not including ancillary activities such as general maintenance or administration."

Title 23 of the Virginia Administrative Code (VAC) 10-210-920 further defines the term "used directly," noting that "items of tangible personal property which are used directly in manufacturing . . . 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." This section continues, "The integrated manufacturing process . . . includes the production line of a plant . . . 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 . . . and conveyed to a warehouse at the plant site . . . ." Subsection C 2 of this regulation provides that equipment used for production line testing and quality control is exempt from taxation.

In Commonwealth of Virginia v. Community Motor Bus Co. , 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in the statute is intended to narrow the scope of the exemption. An exemption, therefore, applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products.

The Taxpayer's fact pattern is analogous to the facts in Public Document (P.D.) 01-205 (12/7/01). In P.D. 01-205, the Tax Commissioner determined that blanket wash, a cleansing agent used to clean rollers in a printing process, was exempt from the retail sales and use tax when used during the production process. However, cleansing agents used prior to or after a production run are considered general maintenance items and are not exempt.

Based on the facts presented, the Immunol used in the Taxpayer's paper manufacturing process is taxable. The Taxpayer uses the Immunol on its calendar stack rollers prior to or after paper has been processed but not during actual production. In accordance with Title 23 VAC 10-210-920 and the decision rendered in P.D. 01-205, the Immunol is used in a taxable maintenance activity.

The Code of Virginia section, regulation and public document cited are available on­line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this ruling, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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