Was software used to plan production, and a thermal oxidizer awaiting pollution-control certification, exempt from Virginia sales and use tax?

Subject

Taxed purchase of computer software used to control production equipment

Plain-English summary

Virginia upheld the assessment on both the coffee manufacturer's production-planning software and its thermal oxidizer.

The CMT software received customer orders, helped plan weekly production runs, and passed data to a separate PLC system. The PLC actually controlled the machinery. Because the manufacturer could enter orders directly into the PLC and had done so before installing CMT, the Commissioner treated CMT as an administrative aid used indirectly in production, not exempt software used immediately to direct or control the production line.

The thermal oxidizer could qualify for Virginia's certified pollution-control exemption only after the Department of Environmental Quality certified it. The taxpayer had not yet obtained that certification, so the Commissioner found no basis to remove the equipment from the assessment.

The assessment therefore remained correct as issued. If DEQ later certified the oxidizer, the taxpayer could present the certification to the Tax Department, but any refund would still have to satisfy the cited refund requirements.

What this means for you

• Software does not become manufacturing-exempt merely because production staff rely on it. Its immediate function matters.
• A planning or tracking system can remain taxable when a separate system actually directs the machinery.
• Pollution-control equipment needs certification from the designated state authority before Virginia's exemption applies.
• Later certification may support a refund request, but it does not itself erase procedural refund requirements.

Common questions

Was the CMT software indispensable to production? The ruling found it useful for planning and administration but not an immediate part of production because order data could be entered directly into the PLC.

Was the PLC software also assessed? The ruling describes the PLC as the system that controlled production machinery, but the disputed software was CMT.

Why was the thermal oxidizer taxable? DEQ had not certified it as pollution-control equipment when the ruling was issued.

Citations and references

• Va. Code § 58.1-609.3(2)(iii) and § 58.1-602.
• 23 VAC 10-210-920(B)(2) and (C)(2).
• Va. Code §§ 58.1-609.3(9)(i), 58.1-3660(B), and 58.1-1823(iv).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-173

Original ruling text

November 14, 2007

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

Dear *:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period October 2000 through June 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a manufacturer of various types of coffee products and operates a production facility in Virginia. The Taxpayer contests the application of the use tax to the purchase of computer software that the Taxpayer contends is used to control production equipment. The Taxpayer also disagrees with the assessment of the tax on equipment used in conjunction with dust collectors to maintain clean air circulation.

DETERMINATION

Software

Virginia Code § 58.1-609.3 2 (iii) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, 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, including all steps of an integrated manufacturing . . . process, but not including ancillary activities such as general maintenance or administration."

Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 interprets the manufacturing exemption and states:

Items of tangible personal property which are used directly in manufacturing... are machinery, tools and repair parts therefor, fuel, 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.

In addition, Title 23 VAC 10-210-920 C 2 provides that the industrial manufacturing exemption applies to "[c]omputer hardware and software used to direct or control production line and/or quality control operations . . . ."

This same section also states that:

Convenient or facilitative items . . . or items that are essential to the operation of a business but not an immediate part of the actual production, are not used directly in manufacturing or processing . . . .

In this instance, customer orders are received by the Taxpayer and are entered into a monitoring and tracking software system (CMT), which is the software at issue. Based on these orders, a weekly production plan is developed through the CMT and then downloaded into another system (PLC). The CMT and PLC systems are two separate and distinct software systems. The PLC, using the downloaded data, controls and directs the production machinery in the production of the desired coffee blend for each customer's order. If the CMT system were not available, the Taxpayer could enter the order information directly into the PLC system. In fact, this was done prior to installing the CMT system. While the CMT software certainly enhances the Taxpayer's administrative capabilities by enabling the Taxpayer to plan its production runs and monitor and track the production of the product, I find that the CMT software is used indirectly in the actual production of the product.

Clean Air Equipment

The equipment at issue consists of a thermal oxidizer. The Taxpayer is currently attempting to secure pollution control certification for the equipment.

Virginia Code § 58.1-609.3 9 (i) provides a sales and use tax exemption for certified pollution control equipment and facilities as defined in Va. Code § 58.1-3660. Va. Code § 58.1-3660 B defines certified pollution control equipment and facilities as:

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.

For purposes of this exemption, the "state certifying authority" is the Department of Environmental Quality (DEQ). To date, the Taxpayer has not received certification from DEQ for the equipment at issue. Accordingly, there is currently no basis to remove the equipment from the audit assessment.

CONCLUSION

Based on the foregoing, the assessment is correct as issued. An updated bill, with accrued interest, will be sent to the Taxpayer. No further interest will accrue provided the bill is paid within 30 days from the bill date.

If the Taxpayer receives the referenced certification from DEQ, it should present such certification to the Department of Taxation. Please note that any refund of tax paid on the pollution control equipment at issue will be subject to the refund requirements under Va. Code § 58.1-1823 (iv).

The Code of Virginia sections and regulations cited 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 regarding this matter, please contact * of the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/54490Q