Were safety supplies sold to Virginia manufacturers exempt merely because production workers used them?

Subject

Items sold used by production workers who are an integral part of the manufacturing process.

Plain-English summary

Most of the safety products remained taxable even though production employees used them. Virginia's manufacturing exemption required an item to be indispensable to actual production and used as an immediate part of the process. Safety rules or operational necessity alone did not satisfy that test.

The Department treated ear-plug stations, warning signs, first-aid items, goggle-cleaning fluid, medical gloves and finger cots, lockout tags, flashlights, harnesses, wrist supports, earmuff repair kits, gas-removal pumps, and spill sorbents as taxable safety, first-aid, lighting, maintenance, or accident-prevention items.

Reflective vests were different. Forklift drivers could be transporting materials within the exempt production process, so their vests could qualify as exempt safety apparel used directly in manufacturing. The Department removed the vests from the audit assessment.

What this means for you

• A manufacturer's exemption certificate does not automatically cover every product sold to that manufacturer.
• Retailers must review whether the class of items fits the exact wording of the certificate.
• Equipment that protects workers but is not an immediate part of production generally remains taxable.
• Safety apparel can qualify when worn by workers directly participating in the integrated manufacturing process.

Common questions

Did incomplete exemption certificates cause the assessment?

No. The ruling says the sales were taxed because the products' uses did not qualify, not merely because most certificates were incomplete.

Why were the reflective vests removed from the audit?

They were used by forklift drivers, and the forklifts could be transporting materials within the exempt production process.

Citations and references

• Va. Code § 58.1-623.
• 23 VAC 10-210-280(B) and 23 VAC 10-210-920.
• P.D. 08-9, discussed for a retailer's certificate-review responsibility.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-239

Original ruling text

September 30, 2010

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period June 2006 through May 2009. I apologize for the delay in the Department's response.

FACTS

The Taxpayer sells safety supplies primarily to manufacturers. The Department's audit of the Taxpayer found that most of the manufacturing exemption certificates maintained on file and reviewed by the auditor were incomplete. However, sales made to manufacturers were held as taxable not due to the incompleteness of the certificates but because the product's use did not qualify for the exemption. The Taxpayer asserts that the sales were incorrectly assessed tax because the items sold are used by production workers who are an integral part of the manufacturing process. The Taxpayer cites Public Document (P.D.) 08-9 (1/11/08) to support its contention that the acceptance of a completed certificate from its customers alleviates its obligation to examine the products sold.

DETERMINATION

Virginia Code § 58.1-623 states, "All sales and leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from taxpayer a certificate to the effect that the property is exempt under this chapter." Title 23 of the Virginia Administrative Code (VAC) 10-210-280 B states:

Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.

P.D. 08-9 (1/11/08) explains that a taxpayer is not expected to "police" its customers' use of the certificates but is expected to review the certificates for completeness and understand that the class of items sold falls within the scope of the wording of the exemption certificate.

Title 23 VAC 10-210-920 clearly states that the manufacturing exemption applies to tangible personal property used or consumed directly in industrial manufacturing or processing. Used directly refers to those activities that are an integral part of the production of a product, including all steps of the integrated manufacturing process. The regulation further states:

Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items,... or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery. Furthermore, the fact that the use of a particular item, such as fire-fighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing.

Although the regulation exempts safety apparel provided gratuitously to the production worker by the manufacturer, it goes on to specifically define safety, accident prevention and first aid products as taxable. Accordingly, the following items presented in your letter as exempt are taxable as follows:

1.Ear Plug Station: Station or stand that holds ear plugs when not being used by the employee. This is not used directly in the production process and is taxable.

2.Cautionary and Warning Signs: These are used for safety and accident prevention and are taxable.

3.First Aid Items: These are taxable.

4.Lens Cleaning Fluid: This cleans safety goggles and is not used directly in the production

5.Gloves and Finger Cots: These are medical gloves and finger splints that are first aid supplies and are taxable.

6.Lock out Tags: These tags keep machinery idle and prevent workers from starting them accidentally. These are for accident prevention and are not used directly in the production process and are taxable.

7.Stealthlite Flashlight: This flashlight is used for additional lighting and is not used directly in the production process and is taxable.

8.Safety Harness and Lanyards: These hold the worker steady at elevated heights and are for safety and accident prevention and are taxable.

9.Wrist Assists: These keep workers wrists strong with added support and are for safety or first aid and are taxable.

10.Hygiene Kit: This is a repair kit is for ear muffs and is not used directly in production and is taxable.

11.Pump for Gas Alert Max: This removes noxious gases from a confined area so as not to build up or harm operators. This its safety equipment and is not part of the production process.

12.Sorbent and Sorbent Socks: These absorb fluid spilled on the production floor and are for safety and are taxable.

Title 23 VAC 10-210-920 defines the manufacturing process as beginning with the handling and storage of raw materials and ending with the completed product being conveyed to the warehouse, ready for sale. The reflective vests held as taxable in the audit are used by forklift drivers. The forklift may be used to transport materials in the exempt production process: therefore, the use of the vest by the worker may qualify as exempt safety apparel used directly in the manufacturing process. As a retailer, the Taxpayer should not be assessed tax for these items.

Based on the determination in this letter, an adjustment will be made to remove the reflective vests from the audit exceptions. The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days from the bill date to avoid additional interest.

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

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-4069131923.M