Did Virginia's manufacturing exemption cover a propane storage tank and stair handrails on an exempt raw-material silo?

Plain-English summary

Virginia held that both the propane storage tank and the stair handrails were taxable indirect-use items. The manufacturer was not entitled to a refund.

The taxpayer manufactured cristobalite from quartz in a high-heat process. It argued that a tank holding propane for the kiln and handrails installed on a raw-material silo qualified for the manufacturing exemption.

Va. Code § 58.1-609.3(2) exempted machinery, tools, fuel, energy, and supplies used directly in manufacturing. Va. Code § 58.1-602 and 23 VAC 10-210-920 required the property to be an immediate, integral part of production rather than merely convenient, facilitative, or essential to the business.

Propane tank

The propane fuel was exempt, but the tank only stored that exempt supply. The ruling applied the regulation's express treatment of fuel-storage tanks and the Virginia Supreme Court's conclusion in Webster Brick that oil-storage tanks were taxable even though the oil was used directly in production.

Silo handrails

The raw-material silo itself was exempt as part of integrated manufacturing beginning with on-site raw-material handling and storage. The handrails were different: they provided access but did not support the silo or play an immediate role in producing cristobalite.

The regulation treated catwalks and walkways used for access, operation, maintenance, or repair as indirect-use property. Prior Department guidance likewise treated safety rails, handrails, platforms, steps, catwalks, and walkways as taxable.

What this means for you

• An exempt fuel or supply does not automatically exempt its storage container.
• An exempt machine or silo does not automatically exempt nearby access equipment.
• Ask whether the item immediately participates in production, not merely whether production depends on it.
• Document whether a structural item supports production machinery or only provides access or convenience.

Common questions

Q: Was the propane exempt?
A: Yes, but the tank used to store it was not.

Q: Was the raw-material silo exempt?
A: Yes. The ruling treated raw-material storage at the plant as part of integrated manufacturing.

Q: Why were the handrails taxable?
A: They provided access and did not support the silo or immediately participate in production.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.3(2).
• 23 VAC 10-210-920(B)(2) and (C)(2).
• Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978).
• Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).
• P.D. 91-183, P.D. 95-140, P.D. 98-10, P.D. 99-115, and P.D. 99-131.

Subject

Items used indirectly in production are taxable.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-183

Original ruling text

December 1, 2014

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period October 2009 through September 2012. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a manufacturer of cristobalite. Cristobalite is a coarse material converted from silicone dioxide quartz and is used in high precision investment casting, abrasives and polishing media, bunker sand, quartz countertops, fillers, paints and coatings.

As a result of the Department's audit, an assessment was issued for untaxed purchases of materials and supplies used in the Taxpayer's manufacturing operation. The Taxpayer contests the tax assessed on (i) a propane tank used to store propane essential to the manufacturing process of the cristobalite, and (ii) the fabrication and installation of a stair handrail on a silo used to store raw materials. The Taxpayer has paid the assessment and seeks a refund of the tax paid on the contested items.

DETERMINATION

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 . . ." [Emphasis added.] Virginia Code § 58.1-602 defines the term "used directly" to mean "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 and administration." Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 interprets the above statutes and states the following:

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, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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. [Emphasis added].

This section further provides that "integrated manufacturing includes the production line of a plant . . . starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished . . . and conveyed to a warehouse at the plant site . . . ."

As set out in Public Document (P.D.) 98-10 (1/20/98), the fact that an item is essential to production is not sufficient grounds for exemption based on the Virginia Supreme Court's holding that "essential items which are not an immediate part of actual production are not exempt." Citing Commonwealth v. Community Motor Bus , 214 Va. 155, 158, 198 S. E.2d 619, 621 (1973) in Webster Brick Company. Inc. v. Department of Taxation , 219 Va. 81, 87, 245 S.E.2d 252 (1978). Also, when there is any doubt as to whether an exemption applies, the Department must adhere to the rule of strict construction of the statutory exemptions as established by the Virginia courts and deny the exemption.

With these authorities in mind, I will now address the issues raised by the Taxpayer.

Propane Tank

The Taxpayer claims that the propane tank stores propane that is used to fire the kiln used in the high heat manufacturing process to convert silicone dioxide quartz to the finished product cristobalite. The Taxpayer contends that the propane storage tank is essential to the manufacturing process and qualifies for the industrial manufacturing exemption.

While propane gas is an exempt supply under Va. Code § 58.1-609.3 2, the propane tank used to store the propane gas is taxable. This is consistent with the established policy set out in P.D. 99-115 (5/18/99) and subsection C 2 of Title 23 VAC 10-210-920 that applies the tax to tanks and containers used to store exempt supplies.

In a similar situation, the Virginia Supreme Court in Webster Brick Company v. Department of Taxation , 219 Va. 81, 245 S.E.2d 252 (1978), which involved the taxability of oil storage tanks, held that even though the oil itself was used directly in the process, the tanks were not used directly in manufacturing but were simply storage facilities and therefore were subject to the tax. Based on the foregoing authorities, the tax was correctly assessed on the charge for the propane tank.

Stair Handrails

The Taxpayer indicates that a silo used to store raw materials used in the manufacturing process qualifies for the manufacturing exemption. As such, the Taxpayer claims that the stair handrails installed on the silo should also be tax exempt. The Taxpayer cites P.D. 95-140 (5/31/95) in support of its position.

P.D. 95-140 addresses silos that were used to store raw materials used in the manufacturing process. The Tax Commissioner determined that the silos used to store raw materials at a plant site were deemed an integral part of the manufacturing process and were exempt from the tax. Under the definition of "manufacturing" found in Va. Code § 58.1-602, the handling and storage of raw materials at the plant site is an exempt production activity.

As in P.D. 95-140, the Taxpayer's silos used to store raw materials are an integral part of the manufacturing process and are exempt from the tax. However, the stair handrails installed on the exempt silos are used only to access the production equipment and clearly serve an indirect role in the production of the product. In P.D. 91-183 (8/26/91), the Tax Commissioner determined that supporting structures must be used solely to support exempt machinery to be considered a "component part" of such machinery. In this instance, the stair handrails are not used to support the structure and therefore are not considered an exempt component part of the silos. [Emphasis added].

Further, pursuant to Title 23 VAC 10-210-920 C 2, catwalks, walkways, etc., regardless of whether used to provide access to production machinery for operation, maintenance or repair of such machinery, are items used indirectly in production and therefore taxable. [Emphasis added].

Lastly, the Tax Commissioner determined in P.D. 99-131 (5/28/99) that mezzanines, safety rails, hand rails, platforms, steps, cat walks and walkways help expedite production but do not play an immediate role in the production processes and are taxable.

Accordingly, the stair handrails are subject to the tax and were properly held in the audit.

CONCLUSION

Based on the foregoing, the assessment is correct as issued, and the Taxpayer is not entitled to a refund of the tax paid on the contested items.

The Code of Virginia sections, regulations, public documents and reference documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5551581386.T