My electronics recycling company uses a forklift for both exempt manufacturing work and other non-exempt tasks -- can I still get the sales tax exemption on it if I can show it's used mostly in the exempt process, even if I didn't have that proof during the audit itself?

Plain-English summary

A Virginia business that dismantles and recycles electronics was audited for October 2013 through September 2019. The Department found it hadn't properly charged, collected, or remitted sales and use tax on various transactions and issued an assessment for tax, penalty, and interest. The company appealed only as to its purchase of a forklift, asking that the tax, penalty, and interest tied to that item be abated.

Is electronics recycling "processing"? Virginia's manufacturing exemption (Va. Code § 58.1-609.3) covers machinery, tools, and repair parts used in industrial manufacturing or processing (§ 58.1-602). Virginia courts have defined "processing" as treatment that makes a product more marketable or useful (Commonwealth v. Orange-Madison Cooperative, 220 Va. 655 (1980); 23 VAC 10-210-920 B 1). Here, the company used a forklift, a hard-drive shredder, and rolling carts to shred obsolete hard drives, separate the reusable materials from waste, and sort them for reclaiming. The auditor agreed this qualified as exempt processing -- the shredded materials were more marketable afterward -- but found the forklift ALSO had non-exempt uses elsewhere in the facility, and that there wasn't enough evidence on the record to establish which use predominated.

The preponderance-of-use rule: no partial credit. When a single piece of equipment serves both an exempt industrial-processing role and a taxable role, Virginia applies an all-or-nothing preponderance-of-use test (§ 58.1-609.3 2; 23 VAC 10-210-920 D): the item is FULLY taxable if 50% or more of its use is non-exempt, and FULLY exempt if 50% or more of its use is in exempt production activities. There's no middle ground -- the equipment doesn't get partially taxed based on a percentage split.

What turned the case. The company conceded the forklift was used in multiple ways around the facility, but argued its PRINCIPAL use was in the exempt processing operation. Had the forklift been used exclusively to load and unload the shredder, it would have been exempt outright; because it was used more broadly, the preponderance-of-use test governed. The auditor had found insufficient evidence at the time of the original assessment. But while the correction request was pending, the company submitted two affidavits -- one from the forklift's primary operator, one from the company's president and owner -- along with supporting books and records, establishing that the forklift's predominant use was in fact in the exempt processing activities. That evidence was enough to satisfy the preponderance-of-use standard.

Outcome, with a recordkeeping reminder. The Department found in the company's favor and removed the forklift-related transactions from the audit and assessment. It also reminded the company that dealers must keep suitable records of transactions subject to sales and use tax (Va. Code § 58.1-633 A; 23 VAC 10-210-470) -- since here, the needed proof came only after the fact, through affidavits assembled during the appeal rather than contemporaneous records.

What this means for you

Manufacturers or processors using equipment for both exempt and non-exempt purposes

There's no partial exemption for a piece of dual-use equipment -- document (ideally contemporaneously) which use accounts for 50% or more of the equipment's actual use, since that alone determines whether the ENTIRE purchase is taxable or exempt.

Anyone whose audit found "insufficient evidence" of preponderant exempt use

This ruling shows that evidence submitted AFTER the original audit -- even affidavits assembled during the correction/appeal process, rather than contemporaneous logs -- can still be enough to flip the result if it credibly establishes the equipment's predominant use.

Recyclers and similar processors treating raw/waste material to make it more marketable

Shredding, sorting, and separating materials to make them more marketable or useful can qualify as exempt industrial "processing," just like traditional manufacturing -- the exemption isn't limited to businesses making new finished products from scratch.

Common questions

Q: My forklift (or similar equipment) is used both in my exempt manufacturing process and for other tasks -- do I get a prorated exemption based on the split?
A: No. Virginia's preponderance-of-use rule is all-or-nothing: if 50% or more of the equipment's use is in exempt processing, the whole purchase is exempt; if 50% or more is non-exempt, the whole purchase is taxable.

Q: The auditor said there wasn't enough evidence to show my equipment's predominant use -- is that the end of the story?
A: Not necessarily. Here, affidavits and records submitted after the audit, during the correction request, were enough to establish preponderant exempt use and reverse the assessment.

Q: Does recycling or dismantling old products count as exempt "processing," even though nothing new is being manufactured?
A: Yes, based on this ruling -- treatment that makes a product more marketable or useful (like shredding and sorting obsolete hard drives for material reclamation) can qualify as industrial processing under Virginia's manufacturing exemption.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-609.3 -- exemption for machinery, tools, or repair parts used in manufacturing or processing
• Va. Code § 58.1-609.3 2 -- preponderance-of-use rule for equipment used in both exempt and taxable activities
• Va. Code § 58.1-602 -- manufacturing and processing must be industrial in nature
• Va. Code § 58.1-633 A -- dealers must keep suitable records of sales, leases, and purchases subject to sales and use tax
• 23 VAC 10-210-920 B 1 and D -- processing defined; the 50%-or-more preponderance-of-use test for dual-use equipment
• 23 VAC 10-210-470 -- sales and use tax recordkeeping requirements

Case law: Commonwealth v. Orange-Madison Cooperative, 220 Va. 655 (1980) -- "processing" means treatment that makes a product more marketable or useful.

A related ruling applying the same preponderance-of-use rule to forklifts at a different facility is this corpus's P.D. 25-69.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-38

Original ruling text

March 27, 2024

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period October 2013 through September 2019. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a Virginia business entity, engages in electronics dismantling and recycling. Under audit, the Department found that the Taxpayer had not properly charged, collected, or remitted retail sales and use tax on various transactions and issued an assessment for the unpaid tax liability, penalty, and interest. The Taxpayer timely appealed, asserting that its purchase of a forklift should be exempt from the use tax and requesting that all tax, penalties, and interest related to that item be abated.

DETERMINATION

Virginia Code § 58.1-609.3 provides an exemption from the retail sales and use tax for machinery, tools or repair parts used in manufacturing or processing. By definition, manufacturing and processing activities must be “industrial in nature” to qualify for the exemption. See Virginia Code § 58.1-602. In Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, (1980), the Virginia Supreme Court interpreted the term “processing” to mean the treatment of a product that makes it more marketable or useful. Both Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1 and the decision in Orange-Madison make it clear that processing occurs only when a product is subjected to a treatment that makes it more marketable or useful.

In this case, the Taxpayer used a forklift, hard drive shredder, and rolling carts to shred obsolete computer hard drives, separate the useful materials from the waste, and sort each material into the appropriate containers for reclaiming. The auditor determined that the process qualified as processing because the obsolete hard drives were more marketable after the treatment. However, the auditor found that the forklift could be used for both exempt and non-exempt purposes and that not enough evidence was available to show the preponderance of its use.

In situations where an industrial processor uses a single piece of equipment in both a taxable and an exempt manner, Virginia Code § 58.1-609.3 2 provides that a preponderance of use rule determines the tax application. This rule is explained in Title 23 VAC 10-210-920 D, which 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 the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from the tax if the preponderance of its use is in exempt production activities.

The Taxpayer concedes the forklift in question is utilized for multiple uses in the facility but argues that its principal use is the industrial processing activities. Because the auditor identified the shredder as equipment used in exempt industrial processing, were the forklift used exclusively in loading and unloading materials from this equipment, it would be exempt from the tax. However, because the forklift is used in multiple ways throughout the Taxpayer’s operations, the Department will apply the preponderance of use test to determine whether the primary use of the forklift is in exempt activities.

In holding the transactions related to the forklift taxable, the Department’s auditor indicates insufficient evidence was available to show preponderance of use. While its application for correction was being considered, the Taxpayer provided two affidavits, one from the primary operator of the forklift and one from the company’s president and owner, as well as various books and records to show that the forklift was utilized primarily in the exempt processing activities. The evidence provided supports finding that the preponderance of use of the forklift was in exempt industrial processing activities. Accordingly, the disputed transactions will be removed from the audit exceptions and resulting assessment.

While the Department finds in favor of the Taxpayer in this case, it is reminded that Virginia Code § 58.1-633 A requires every dealer to keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The record keeping requirements are further explained in Title 23 VAC 10-210-470.

The Code of Virginia sections and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3673.C