SALT Report 1904 – The Virginia Tax Commissioner issued a ruling regarding a Taxpayer’s application of the manufacturing exemption on its purchases of repair parts for an integrated power wash system. The Taxpayer is a manufacturer of paint and coating products. The Taxpayer produces each product separately and uses a different production tank for every batch due to the various formulation requirements and color specifications. After a particular batch of product is completed, the tank must be cleaned using a power wash system that is hard piped into the production tank. This process occurs every two to three days.
The Taxpayer states that the power wash cleaning system is necessary to the production process as it maintains the color, chemistry and integrity of each batch of paint and coating products they produce. The Taxpayer notes that if any product batch is contaminated by a previous product it must be discarded. The Taxpayer requested guidance regarding whether its purchase of the integrated power washer and repair parts qualified for the manufacturing exemption.
Virginia Code § 58.1-609.3 2 iii provides an exemption for “machinery or tools or repair parts…or replacements of fuel, power, energy, or supplies, used directly in processing, manufacturing … products for sale or resale…” and Virginia Code § 58.1-602 defines “used directly” as “those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration.”
The Commissioner determined that the use of the power wash system is not an integral part of the Taxpayer’s production process because the power washing of the tanks does not occur during production. The tanks are power washed only after the production of a product batch has ended. Further, the Commissioner noted that because the tanks are power washed every few days, the power washer cannot be considered an immediate part of the Taxpayer’s production process.
Therefore, the Commissioner ruled that the Taxpayer’s integrated power wash system and the repair parts for the system do not qualify for the Virginia retail sales and use tax manufacturing exemption because the power wash system is not used directly in production as required by Virginia Code § 58.1-602.
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