Could a separate tobacco packaging-and-shipping service buy cartons, paper, chipboard, and strapping under Virginia's manufacturing exemption?

Subject

Separate tobacco packaging service was consumer of materials

Plain-English summary

Virginia ruled that the separate tobacco packaging-and-shipping company was the taxable consumer of its packaging materials. It received raw tobacco leaves, preserved, packaged, and shipped them for an international manufacturer, but did not process the tobacco or change its form.

The manufacturing packaging exemption required both use by an industrial manufacturer or processor and use within the plant-site production line through completion for sale. This company was a service provider operating away from the manufacturer's plant, so cartons, kraft paper, chipboard, and strapping did not qualify.

The company had to pay sales tax to vendors. If vendors did not collect it, the company had to remit Virginia consumer use tax on Form ST-7.

What this means for you

• Being part of a manufacturer's supply chain does not itself make a service provider a manufacturer.
• Off-site handling and storage of raw materials can fall outside the statutory production line.
• Packaging exemptions may depend on who uses the materials, not only what the materials do.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.3 2 iv.
• 23 VAC 10-210-920 A.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-103

Original ruling text

July 3, 2014

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your correspondence in which you request a ruling on the proper application of the Virginia retail sales and use tax to packaging materials used by * (the "Taxpayer"). I apologize for the delay in responding to your request.

FACTS

The Taxpayer was established in 2009 as a service provider for * (the "Manufacturer"), an international tobacco processor and manufacturer. The Manufacturer purchases tobacco leaves from tobacco growers stateside. The Taxpayer receives, preserves, packages, and ships the tobacco leaves on behalf of the Manufacturer to processing locations predominantly outside the United States. The Taxpayer does not process the tobacco or change the form of the tobacco. The Taxpayer purchases and uses cardboard cartons, kraft paper, chipboard, and strapping materials to package the tobacco product in cartons ranging in weight between 265 and 485 pounds per carton. The tobacco is then shipped at the Manufacturer's request to locations throughout the world.

The Taxpayer maintains that it is an integral part of a vertical manufacturing process and requests a ruling as to which packaging items may be purchased tax exempt under the manufacturing and processing exemption provided in Va. Code § 58.1-609.3 2.

RULING

Virginia Code § 58.1-602 defines manufacturing to include the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing to the last step of production where the product is completed for sale and conveyed to a warehouse at the production site. Virginia Code § 58.1-609.3 2 sets forth the retail sales and use tax exemption as it applies to industrial manufacturers and processors. Subsection (iv) of this statutory exemption addresses packaging and shipment by industrial manufacturers and states that the exemption applies to "materials, containers, labels, sacks, cans, boxes, drums, or bags for future use for packaging tangible personal property for shipment or sale." This exemption is interpreted by Title 23 of the Virginia Administrative Code 10-210-920 A to apply to the types of tangible personal property listed when used or consumed by industrial manufacturers and processors.

Based on the cited authorities as they relate to the Taxpayer's operation, two conditions must be met to qualify for the exemption. First, the manufacturing exemption is confined to the production line of a plant site and continues through the last step of the process where the product is completed for sale. Second, the cardboard cartons, kraft paper, chipboard, and strapping materials must be used by an industrial manufacturer or processor to qualify for the exemption.

Based on the facts set forth in this letter and the information furnished to a member of my staff by the Taxpayer, while the Taxpayer is providing packaging and shipping services for an industrial manufacturer, the Taxpayer itself does not qualify as an industrial manufacturer or processor. In addition, while it is acknowledged that the Taxpayer is clearly handling and storing raw materials for an industrial manufacturer, such handling and storage is away from the plant site and does not fall within the strict parameters of manufacturing as defined in Va. Code § 58.1-602. For these reasons, I find that the Taxpayer is the consumer of all the materials used in providing packaging and shipping services to the Manufacturer. As such, the Taxpayer is required to pay the sales tax to its vendors on purchases of packaging and shipping materials. If the vendors do not charge and collect the sales or use tax, the Taxpayer must remit consumer use tax on its purchases directly to the Department using Form ST-7, Virginia Business Consumer's Use Tax Return.

This response is based on the facts presented summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. The Taxpayer may also register to remit Virginia consumer use tax to the Department at this web site and can access Form ST-7 by clicking on the Forms link at the homepage. If you have any questions concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5451117030.S