Are replacement air-conditioning units and repair parts for exempt manufacturing cranes also exempt from Virginia sales tax?

Subject

Manufacturing Exemption; Repair and replacements parts.

Plain-English summary

A manufacturer used cranes to move material through its production process. The cranes came with air-conditioning units in their cabs, and the company periodically replaced those units or their parts during maintenance.

Virginia found that the cranes were used directly in exempt manufacturing and could be purchased without sales tax. The manufacturing regulation also exempted replacement and repair parts used to replace worn or damaged components of exempt machinery.

Because the air-conditioning units were integral parts of the cranes when originally purchased, replacement units and repair parts installed on those cranes qualified for the same exemption.

Citations and references

• Va. Code § 58.1-609.3(2).
• 23 VAC 10-210-920 C 2.
• P.D. 95-31.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-103

Original ruling text

May 25, 2016

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which * (the “Taxpayer”) requests a ruling on the application of the Virginia retail sales and use tax to the purchase of replacement and repair parts for manufacturing equipment. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is a manufacturer. As a part of the exempt manufacturing process, the Taxpayer utilizes cranes in its material handling operation. The cranes are purchased new and come equipped with air conditioning units for the cabs. As a normal part of crane maintenance and repair, the Taxpayer replaces the air conditioning units or air conditioning parts. The Taxpayer asks if the replacement air conditioning units and the repair parts for the air conditioning units qualify for the industrial manufacturing exemption.

RULING

Virginia Code § 58.1-609.3 2 provides an exemption from the retail 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.” The Taxpayer's cranes are used to move material in process through the manufacturing process. Based on the information provided by the Taxpayer, the cranes are used directly in an exempt manufacturing activity. The cranes qualify as exempt equipment for purposes of the manufacturing exemption and may be purchased tax exempt.

Title 23 of the Virginia Administrative Code (VAC) 10-210-920 provides the Department's regulatory interpretation of the manufacturing exemption found in Va. Code § 58.1-609.3 2. Subsection C of 23 VAC 10-210-920 divides manufacturing activities into three main functions. These are administration, production and distribution. Title 23 VAC 10-210-920 C 2 addresses the production function for manufacturing and processing and provides the following:

Replacement and repair parts which are used to replace worn or damaged parts on exempt machinery and equipment, as well as operating supplies which are actively and continually consumed in the operation of exempt machinery and equipment, are deemed used directly in manufacturing or processing and are not subject to the tax.

Based on the above, the cranes in question were purchased by the Taxpayer exempt of the sales tax because the cranes are used directly in an industrial manufacturing process to produce products for sale or resale. The air conditioning units were an integral part of the cranes when the cranes were originally purchased. In accordance with the above statute and regulation, replacement air conditioning units and repair parts for the air conditioning units are exempt from the sales and use tax when installed on the exempt cranes. This is in accordance with long-standing policy as set forth in Public Document 95-31 (2/28/1995).

This response is based on the information provided in your letter as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia section, regulation, and public document cited are available at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any additional questions about this ruling you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6025458889.S