Virginia – Industrial Processing Exemption

SALT Report 2368 – The Virginia Tax Commissioner issued a letter ruling regarding a Taxpayer’s purchases of chemicals and additives used in its water treatment facility. The Taxpayer is a public water service provider who extracts water from the ground and transports it to a processing center where it is measured, metered and chemically treated. After the water has been processed, it is transported to a storage tank and no additional processing occurs and no chemicals are added. From the storage tank, the water is distributed to the customer.

The Taxpayer requested a re-determination of an audit assessment for its purchases of chemicals and additives that were used to treat and store the water, and for the property that was purchased to distribute the water to the customer. In its appeal, the Taxpayer stated that the language in the industrial processing exemption led him to believe that the exemption extended to quality control testing supplies that are used in the water distribution process.

In its response, the Tax Commissioner stated that although the Taxpayer is an industrial processor and qualifies for the manufacturing exemption the exemption cannot be used for items used in distribution. Virginia Administrative Code 10-210-920 C 3 specifically provides that distribution is “the transport or conveyance of products after the completion of production and is not part of manufacturing or processing.” Further, the regulation states that tangible personal property used to transport manufactured products to market or to customer as well as any tangible personal property used to convey, transport, handle, store, market or display the finished products are taxable.

Accordingly, the Commissioner stated that once the water has left the processing center and enters the well storage tank, the water is considered a finished product because no additional chemicals or additives are added and the water is ready for sale. Further, according to the language of VAC 10-210­920 C 3, the transmission of water to the customer falls within the definition of “distribution” and is taxable.

Based on that regulation, the Commissioner determined that distributing water to the customer does not qualify as industrial processing. As a result, any property used in water distribution will not qualify for the exemption in Va. Code § 58.1-609.3 2. Therefore, the Commissioner determined that the original assessment for sales and use tax against the Taxpayer was correctly imposed and there was no basis for adjustment.

Lastly, the Taxpayer claimed that some of the assessed purchases included chemicals and additives that were used for water treatment and were required by the Virginia Department of Health. The Commissioner stated that, although these purchases may be required by the Department of Health, that requirement does not make the purchase exempt. The purchase must qualify for a specific exemption under the Virginia Retail Sales and Use Tax Act, which they do not. Therefore, the Commissioner determined that the audit assessment for the chemicals and additives was correct and again, there was no basis for revision.

For Further Information

Virginia Department of Revenue – Rulings of the Tax Commissioner #13-44