Were a permanent structure housing a production crane and magnesium-chloride dust-control equipment exempt manufacturing property?

Subject

Permanent crane structure and plant dust control were not directly used in production

Plain-English summary

Virginia upheld tax on the materials and equipment used to build a structure around a bridge crane and on magnesium-chloride tank repairs. The precast-concrete manufacturer argued that the crane structure was exempt production equipment and that the dust-control chemical served like safety apparel.

Steel beams, channels, panels, bars, nuts, bolts, paint, tape, brushes, rope, primer, rental equipment, and tools were used in plant construction. The structure rested on concrete footers and became part of the realty. It housed exempt machinery but was not itself an immediate component of production.

Magnesium chloride was spread on the plant ground to suppress dust. It was not clothing or safety apparel and was not used directly to manufacture or protect the product. Virginia emphasized that an item can be essential, convenient, or legally required without qualifying as directly used in manufacturing.

What this means for you

• Permanent structures housing machinery were taxable plant construction.
• A support could qualify only when it was part of exempt machinery and did not become affixed to realty.
• Construction tools, rentals, and consumables remained taxable ancillary items.
• Worker-safety or environmental compliance did not alone establish direct production use.

Common questions

Why was the crane structure taxable if the crane was used in production?

The structure was permanently anchored to realty and housed the crane rather than operating as an immediate machinery component.

Was magnesium chloride treated like protective apparel?

No. It was a ground-applied dust-control material, not clothing, and it did not directly manufacture the product.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.3(2)(iii).
• 23 VAC 10-210-920(B)(2) and (C)(2).
• Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978).
• P.D. 95-38 and 01-15.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-73

Original ruling text

May 26, 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 January 2004 through October 2006. The Department's records indicate that the Taxpayer has paid the assessment in full. I apologize for the delay in responding to you appeal.

FACTS

The Taxpayer manufactures and sells pre-cast concrete products. The Taxpayer was assessed tax, penalty and interest on the purchase of materials, tools, rental equipment and supplies used to erect a structure that houses a bridge crane used in production activities.

The Taxpayer contests the tax assessed and claims the building is actually an overhead crane structure based on the general definition of overhead cranes as found in the Occupational Safety and Health Standards part 1910.179 and exempt of the tax.

In addition, the Taxpayer was assessed tax on repair parts used for a magnesium chloride tank. The Taxpayer takes exception to the tax assessed on the purchase of repair parts related to the application of magnesium chloride for dust suppression. The Taxpayer claims the magnesium chloride prevents the employees from breathing air borne particulates. The Taxpayer maintains that the magnesium chloride serves the same purpose as a dust mask that would be exempt by definition as apparel.

DETERMINATION

Construction Materials and Equipment

Virginia Code § 58.1-609.3 2 (iii) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale . . . ." [Emphasis added.] 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 B 2 interprets the above statutes, stating the following:

Items of tangible personal property that 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. Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery.

In addition, Title 23 VAC 10-210-920 C 2 discusses production activities conducted by manufacturers and lists examples of taxable and exempt tangible personal property used in production and states, in pertinent part::

Ancillary activities such as plant construction are not a part of production and are taxable. Accordingly, construction materials such as concrete, structural steel, and roofing which becomes permanently incorporated into the production plant and machinery and tools used in the construction of the plant are taxable.

Steel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax. However, concrete floors or foundations on which such supports rest or to which machinery is bolted, and structures housing machinery are not used directly in manufacturing and processing and are subject to tax. [Emphasis added.]

Accordingly, the fact that an item is essential to production is not sufficient for exemption based on the Virginia Supreme Court's holding that "essential items which are not an immediate part of actual production are not exempt." See Webster Brick Company, Inc. v. Department of Taxation , 219 Va. 81, 245 S. E.2d 252 (1978).

Based on the above, I find that the steel beams, steel channels, panels, flat bar, nuts and bolts used in the construction of the structure are taxable. In order for these items to be exempt, they must be a component part of the exempt machinery and must not become affixed to realty. In this instance, the contested items are used in the construction of the structure that houses the bridge crane. The structure is anchored to concrete footers and becomes affixed to realty. Therefore, the contested items used in the construction of the structure do not qualify for the exemption. Further, ancillary activities such as rental equipment, tools and supplies used in the construction of the structure are taxable. This is consistent with Public Document (P.D.) 01-15 (3/9/01), in which the Tax Commissioner ruled the purchases of materials that became a part of a building comprising the shell of a wind tunnel facility were taxable because the shell of the building constituted a permanent structure.

In addition, paint, plastic tape, paint brushes, rope, primer, and other similar items used in the construction project are not used directly in manufacturing and are subject to the tax. The Taxpayer is deemed liable for the use tax on the purchase of such items. Accordingly, I find the assessment is correct as assessed on the contested construction project for the erection of the structure.

Magnesium Chloride Tank

Title 23 VAC 10-210-920 provides an exemption for safety apparel furnished gratuitously by a manufacturer to production line employees. "Apparel" is defined in The American Heritage Dictionary 125 (2"d ed. 1985) as, "clothing, esp. outer garments; attire." The contested magnesium chloride is clearly not "safety apparel." Accordingly, the exemption for safety apparel is not applicable.

As mentioned above, Title 23 VAC 10-210-920 specifically lists as taxable items that are essential to the operation of a business but not an immediate part of actual production. The regulation further states, "the fact that the use of a particular item . . . may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing." In this case, magnesium chloride is spread on the ground at the plant site as a dust control measure. Therefore, the magnesium chloride is not used directly in the manufacturing of products for sale or resale, nor is the primary purpose to protect the integrity of the product. Consequently, the magnesium chloride and repair parts for the magnesium chloride tank do not qualify for the exemption provided by Va. Code § 58.1-609.3 2. This is consistent with P.D. 95-38 (3/14/95), in which the Tax Commissioner ruled that filtration equipment required to provide OSHA dust level compliance did not meet the requirement for direct usage in manufacturing.

CONCLUSION

In accordance with the aforementioned authorities, the Taxpayer is liable for the sales and use tax on the contested purchases. Therefore, the tax assessed in the audit is correct.

The Code of Virginia sections, regulations and public documents 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/1-2202780450.T