Was a wastewater heat-recovery system that preheated water for an industrial laundry exempt as direct industrial processing equipment?

Subject

Wastewater heat-recovery system qualified as exempt laundry subprocessing equipment

Plain-English summary

Virginia exempted the industrial laundry's wastewater heat-recovery system. The equipment passed hot process wastewater through a heat exchanger to preheat incoming fresh water. A boiler then raised that water to the final temperature needed by the laundry processing equipment.

Virginia's exemption covered machinery and supplies used directly in maintaining and preparing textile products for commercial rental or leasing. The used-directly rule included integrated production steps and subprocessing that produced property used directly in the main process.

Because the boiler's water heating was exempt and the recovery system performed the same function at an earlier stage, Virginia treated the preheating as integral subprocessing. The Department removed the system from the audit and abated the tax-and-interest bill.

What this means for you

• Equipment can qualify even when it supports the main process through a separate subprocessing step.
• The key link here was that the recovered heat prepared fresh water used directly by exempt laundry equipment.
• Energy efficiency alone was not the stated test; integration into the industrial process was.

Common questions

Did the system wash textiles itself?

No. It preheated incoming water used by the processing equipment.

Why was preheating considered direct use?

The system served the same process function as the exempt boiler and produced heated water for direct use in laundry processing.

What happened to the assessment?

The system was removed from the audit, and the bill for tax and interest was abated.

Citations and references

• Va. Code § 58.1-609.3(8).
• 23 VAC 10-210-920(B)(2).
• Virginia Public Document 97-20.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-134

Original ruling text

September 8, 2009

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period October 2004 through December 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an industrial processor of laundry. At issue is the tax assessed on the Taxpayer's purchase of a wastewater heat recovery system. The heat recovery system moves process wastewater through tubes (or plates) of the heat exchanger in a flow direction that is opposite the fresh water on the outside of the tubes in the shell. The shell and tube type heat exchanger reclaims heat from the hot wastewater to preheat incoming fresh water. The fresh water is then heated to a higher second temperature by a boiler for use in the processing equipment. The Taxpayer claims that the equipment is an integral part of its manufacturing process and is exempt: from the tax pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-920.

DETERMINATION

Virginia Code § 58.1-609.3 8 exempts from the retail sales and use tax:

Tangible personal property including machinery and tools, repair parts or replacements thereof, and supplies and materials used directly in maintaining and preparing textile products for rental or leasing by an industrial processor engaged in the commercial leasing or renting of laundered textile products.

Title 23 VAC 10 210 920 B 2 defines the term "used directly" as it relates to industrial manufacturing and processing as follows:

The term "used directly" refers to those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, management, and administration.

The regulation further explains that an exemption is available for "subprocessing activities which produce tangible personal property used directly in the main manufacturing or processing activity."

In this instance, the boiler that heats incoming water for use in the Taxpayer's laundry process enjoys the industrial processing exemption. The heat recovery system serves the same purpose because it is used to preheat such water, which in turn is used directly in the processing equipment. In accordance with the above authorities, the heat recovery system is a subprocessing activity and qualifies for the exemption. Therefore, the purchase of the heat recovery system will be removed from the audit assessment. This is consistent with the Tax Commissioner's ruling in Public Document 97-20 (01/24/97).

CONCLUSION

The assessment represents the tax and interest assessed on the contested heat recovery system. Based on the above determination, the Department will abate the bill.

The Code of Virginia sections and regulation cited 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 about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2416189934.T