Were a lumber manufacturer's forklifts exempt when more than half of each forklift's use occurred in production activities?

Subject

Forklifts removed from audit preponderance of use is in exempt production activities.

Plain-English summary

Virginia removed both forklifts from the use-tax audit because the preponderance of each one's use was in exempt manufacturing. One forklift operated entirely in exempt production activities.

The second forklift spent 40% of its time unloading raw materials, 40% loading completed goods for shipment, and 20% moving unfinished products through the yard between storage and production areas. Virginia treated the yard movements as part of the integrated manufacturing process because they occurred before production was complete. That produced 60% exempt use and 40% taxable use.

Under the regulation, an item used in both taxable and exempt activities is fully exempt when more than half of its use is in exempt production. The remaining audit balance was abated.

The taxpayer had not maintained detailed forklift records during the audit. Although Virginia accepted later usage information on appeal, it warned that manufacturers should keep detailed records so auditors can verify mixed use.

What this means for you

• The manufacturing process can include handling unfinished goods between production stages at the plant.
• Loading finished products for shipment was taxable use here.
• Mixed-use equipment receives all-or-nothing treatment based on which use exceeds 50%.
• Contemporaneous usage logs are important even when later evidence may be reviewed on appeal.

Citations and references

• 23 VAC 10-210-920(B)(2) and (D).
• P.D. 95-192, P.D. 99-115, and P.D. 06-102.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-39

Original ruling text

April 15, 2008

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

Dear *:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to your client, * (the "Taxpayer"), for the period July 2003 through September 2006. I apologize for the delay in responding to you.

FACTS

The Taxpayer is a lumber manufacturer that was audited by the Department. The Taxpayer asserts that the assessment of use tax on two forklifts used at its manufacturing site is erroneous. The Taxpayer contends that the forklifts qualify for the manufacturing exemption because the preponderance of their use is in the Taxpayer's exempt manufacturing process.

DETERMINATION

Preponderance of Use

The Taxpayer has provided documentation summarizing the use of the forklifts in its operations. Based on the information provided, one of the forklifts is used 100 percent of the time in exempt manufacturing activities. The other forklift is used 40 percent of the time in an exempt activity (unloading raw materials) and 40 percent of the time in a taxable activity (loading finished goods for shipment). The remaining 20 percent of usage occurs in an area the Taxpayer refers to as the "yard." The forklifts in the yard are used to move unfinished products from storage to various production areas and from one production area to another.

Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 states, in part:

The integrated manufacturing process . . . includes 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 and completed for sale and conveyed to a warehouse at the same plant site . . . .

Title 23 VAC 10-210-920 D states:

When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from the tax if the preponderance of its use is in exempt production activities.

Based on the information provided by the Taxpayer, the activities in the yard occur prior to the completion of production and are an integral part of the manufacturing process. It has been established that one of the forklifts is used exclusively in exempt production activities. The remaining forklift is used more than 50 percent of the time in exempt manufacturing activities, including its use in the yard. Based on the preponderance of use test, both forklifts will be removed from the audit and the assessment will be adjusted accordingly.

Usage Records

The Taxpayer did not maintain detailed records during the audit period to document the use of forklifts at its manufacturing facility. In its appeal letter, the Taxpayer cites Public Documents 95-192 (7/31/95), 99-115 (5/18/99) and 06-102 (10/5/06) to demonstrate that the Department will review usage information after the completion of an audit to resolve preponderance of use issues in administrative appeals. Notwithstanding this fact, the Taxpayer should maintain detailed usage records for all items used in both taxable and exempt activities at its manufacturing facility. Without such records, the Department's auditors cannot verify the usage of these items and have no choice but to hold the items taxable in an audit.

Conclusion

The Department's records indicate that the Taxpayer has paid the uncontested balance of the audit assessment. The remaining balance of the assessment will be abated in full. The Code of Virginia section, regulation 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 web site. If you have any questions concerning this response or need further assistance, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely

Janie E. Bowen

Tax Commissioner

AR/1-1281119699S