Did Virginia remove use tax assessed on a manufacturer's software, checks, forklift, maintenance supplies, and other purchases?

Subject

Manufacturer failed to prove exemptions for audited asset and expense purchases

Plain-English summary

Virginia upheld the manufacturer's entire use-tax assessment because the claimed exemptions were unsupported or the items were used in taxable activities. The company made aluminum oxygen cylinders and was audited for January 2006 through December 2008.

The taxpayer said an Epicor computer program and laser checks were neither received nor used, but invoices showed their acquisition and no return. It supplied no invoices or exempt-use evidence for a repair kit, cylinder, starter, tank rental, drill repair, petroleum products, or office safety supplies.

The forklift also remained taxable. Although the taxpayer said it was used only in manufacturing, the auditor observed it being used more than 80% of the time to remove waste outside the building. The regulation treated plant-waste removal as taxable and imposed tax in full when at least 50% of an item's use was nonexempt.

Cleaners, lubricants, and coolants used on production machinery were taxable maintenance supplies under the cited regulation. With no contrary proof, Virginia made no adjustment.

What this means for you

• An audit assessment is presumed correct, so exemption claims need invoices and use records.
• Mixed-use manufacturing equipment can be fully taxable when at least half its use is nonexempt under the rule applied here.
• Removing plant waste was not treated as an immediate part of production.
• Cleaning and maintaining production machinery did not make the maintenance supplies exempt.

Common questions

Why did the software and checks remain taxable?

The invoices showed they were acquired, and the taxpayer provided no evidence of a return.

Why was the forklift taxable?

The auditor observed that more than 80% of its use was removing waste, and the taxpayer offered no contrary evidence.

Did Virginia reduce the assessment?

No. The ruling said no adjustment was warranted.

Citations and references

• Va. Code §§ 58.1-205 and 58.1-609.3(2).
• 23 VAC 10-210-920.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-84

Original ruling text

June 4, 2010

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

Dear *:

This is in response to your letter written on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued as a result of the Department's audit for the period January 2006 through December 2008. I apologize for the delay in the Department's response.

FACTS

The Taxpayer, is a manufacturer of aluminum oxygen cylinders. Both the administrative and manufacturing facilities are located in Virginia. The Taxpayer was assessed use tax on asset and expense purchases. Assets were reviewed in detail for the audit period using Taxpayer's federal returns and purchase invoices. Expense purchases were sampled using the Taxpayer's transaction-by-vendor list, general ledger and purchase invoices. The Taxpayer protests the tax assessed on certain expense and asset purchases.

DETERMINATION

Pursuant to Va. Code § 58.1-205, any assessment made by the Department is assumed to be prima facie correct with the burden resting with the taxpayer to prove otherwise. In this case, the Taxpayer did not provide any documentation to support its protest with the original appeal application. Additional documentation has been requested but has not been received as of this date.

Because the Taxpayer has not provided supporting evidence of the asserted claims of exemption, the determinations that follow are based on the available

information.

Epicor Computer Program and Laser Checks

The Taxpayer represents that these products were neither received nor used by the Taxpayer. However, the auditor's review of the purchase invoices indicated the acquisition of these items with no subsequent return. As such, these items will remain in the audit.

Additional Purchases

The following purchases will also be held taxable because no purchase invoices or evidence of the claimed exempt use in the manufacturing process has been presented: repair kit, cylinder, starter, tank rental, drill repair, petroleum products and office safety supplies.

The remaining purchases will be addressed in accordance with Va. Code § 58.1­609.3 2 and Title 23 of the Virginia Administrative Code (VAC) 10-210-920:

Forklift

The Taxpayer asserts that: this equipment is used only in the manufacturing process; however, the auditor observed the forklift being used more than 80% of the time to remove waste products outside of the building. Title 23 VAC 10-210-920 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 evidence of the item's use fifty percent or more) is in the non-exempt activity.

Title 23 VAC 10-210-920 classifies as taxable any piece of tangible personal property used to remove plant waste and pollutants. The Taxpayer has offered no evidence to contradict the auditor's finding regarding this asset's primary use. Therefore, this purchase will be held as taxable.

Cleaners, Lubricants and Coolants

The Taxpayer describes these products as being used to clean and lubricate machinery and tools used in the production process. Title 23 VAC 10-210-920 states the tax applies to tangible personal property used in the servicing and maintenance of production machinery. Therefore, these products will remain in the audit.

Conclusion

Based on the foregoing, no adjustment to the assessment is warranted. An updated bill, with the interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges.

The Code of Virginia and regulation sections 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 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/1-350005360.M