Does Virginia's manufacturing sales and use tax exemption cover materials used to construct a new electrical generating facility?

Subject

Exemption : Used Directly in Manufacturing - Construction of Facility

Plain-English summary

A company planning to build a utility-scale electrical generating facility in Virginia asked the Tax Commissioner whether the manufacturing sales and use tax exemption in Va. Code § 58.1-609.3 2 would apply to materials used in constructing the plant. The facility was designed to operate as an independent merchant power plant, selling electricity wholesale into Virginia and surrounding regional markets, and importantly would not be classified as a public service corporation or public service company under Virginia law.

Because the Taxpayer did not identify the specific materials, equipment, or supplies that would be used in construction, the Tax Commissioner could not issue a specific yes-or-no determination. Instead, the ruling lays out general guidance: the exemption covers machinery, tools, and supplies used directly in manufacturing, processing, or converting products for sale, but it does not extend to machinery, tools, or equipment used by a public service corporation to generate electric power (except for raw materials and fuel that are inputs to production). The ruling also reiterates that "used directly" means items that are an integral, immediate part of actual production -- not convenient or facilitative items like fuel storage tanks, platforms, structural steel, or equipment supports, and not property used for repair and maintenance of production machinery, which remains taxable.

What this means for you

Companies building electric generating facilities

Because the Taxpayer here was not a public service corporation, the statutory carve-out that strips the exemption from public-service-corporation electric generation equipment would not automatically apply to it in the same way -- but the ruling does not resolve how the exemption applies to any particular purchase. Any company constructing a generating facility needs to analyze each category of construction material or equipment separately against the "used directly" standard to know whether it qualifies.

The "used directly" test is narrow

Only machinery, tools, repair parts, fuel, power, energy, or supplies that are indispensable to the actual, immediate production process qualify. Items that are merely convenient, facilitative, or supportive -- such as structural steel, platforms, special flooring, or equipment supports -- do not qualify even if they are directly attached to exempt production machinery. Repair and maintenance of production equipment is also a taxable activity, not an exempt one.

Get a ruling on specific items, not general activities

This ruling shows the Department will not issue a specific determination without specific facts. A taxpayer seeking a binding answer on particular construction materials or equipment should identify each item and its intended use so the Department can apply the exemption criteria directly, rather than receiving only general guidance.

Common questions

Q: Did the Tax Commissioner rule that the facility's construction materials were exempt or taxable?
A: Neither -- the ruling provides general guidance only. The Taxpayer did not identify the specific materials, equipment, or supplies at issue, so the Department could not determine how the exemption would apply to particular purchases.

Q: Does the manufacturing exemption ever exclude equipment used to generate electricity?
A: Yes. Va. Code § 58.1-609.3 2 states the exemption does not apply to machinery, tools, and equipment, or other tangible personal property used by a public service corporation in the generation of electric power, except for raw materials that are inputs to production of electricity, including fuel.

Q: Is the Taxpayer in this ruling a public service corporation?
A: No. The Taxpayer stated the facility would operate as an independent merchant power plant supplying electricity wholesale and would not be classified as a public service corporation or public service company under the Code of Virginia.

Q: What does "used directly" mean for manufacturing equipment?
A: Under Title 23 VAC 10-210-920 B 2, it means activities that are an integral part of production, including all steps of an integrated process, but not incidental activities like general maintenance, management, or administration. Convenient or facilitative items such as fuel storage tanks, platforms, or structural steel do not qualify even if attached to exempt machinery.

Q: Is repairing or maintaining production machinery covered by the exemption?
A: No. Title 23 VAC 10-210-920 C 2 provides that tangible personal property used to repair, service, and maintain production machinery is taxable, since those activities occur before or after actual production rather than as an immediate part of it.

Q: What happened to the public service corporation exemption for electric utilities generally?
A: The ruling notes that effective September 1, 2004, the public service corporation exemption for electric utilities was repealed, except for raw materials and fuel consumed in the production of electricity, citing P.D. 04-122 (8/30/2004).

Citations and references

Statutes and regulations:

• Va. Code § 58.1-609.3 2 (manufacturing exemption; excludes public service corporation electric generation equipment except raw materials/fuel)
• Title 23 VAC 10-210-920 B 2 (definition of "used directly" in manufacturing and processing)
• Title 23 VAC 10-210-920 C 2 (repair and maintenance of production machinery is taxable)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-197

Original ruling text

December 8, 2020

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on behalf of * (the “Taxpayer”), regarding the application of the Virginia retail sales and use tax to materials used in connection with the construction of an electrical generating facility. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer proposes to construct a utility-scale electrical generating facility in Virginia. The Taxpayer indicates that the facility will operate as an independent merchant power plant to supply electricity on a wholesale basis to electricity markets in Virginia and surrounding regions. While the facility will create and produce energy, the facility will not be classified as a public service corporation or public service company under the applicable provisions in the Code of Virginia . The Taxpayer requests a ruling on the application of the manufacturing exemption provided in Virginia Code § 58.1-609.3 in connection with the construction of the facility.

DETERMINATION

In this instance, the Taxpayer does not specifically identify the materials, equipment or supplies that would be used in connection with the construction of the electrical generating facility. Therefore, general application guidance is provided

Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for the following:

(i) Industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product; (ii) industrial materials that are coated upon or impregnated into the product at any stage of its being processed, manufactured, refined, or converted for resale; (iii) 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; (iv) materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale; or (v) equipment, printing or supplies used directly to produce a publication described in subdivision 3 of § 58.1-609.6 whether it is ultimately sold at retail or for resale or distribution at no cost. Machinery, tools and equipment, or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is directly in processing, manufacturing, refining, mining or converting products for sale or resale. The provisions of this subsection do not apply to the drilling or extraction of oil, gas, natural gas and coalbed methane gas. In addition, the exemption provided herein shall not be applicable to any machinery, tools, and equipment, or any other tangible personal property used by a public service corporation in the generation of electric power, except for raw materials that are inputs to production of electricity, including fuel. [Emphasis added.]

Effective September 1, 2004, the public service corporation exemption for electric utilities was repealed, except for raw materials and fuel consumed in the production of electricity. For additional information, see Public Document (P.D.) 04-122 (8/30/2004).

All exemptions from the retail sales and use tax are required to be strictly construed against the one claiming the exemption. Commonwealth v. Community Motor Bus , 214 Va. 155, 198 S.E.2d 619 (1973). With this strict construction rule in mind, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 defines the term “used directly” as meaning “those activities that are an integral part of the production of a product, including all steps of an integrated process, but not including incidental activities such as general maintenance, management, and administration.” In conformity with the strict construction rule, this regulation further states:

Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts thereof, 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 par 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 firefighting and safety equipment, may be required by federal state or local law is not, by itself, dispositive of direct usage in manufacturing or processing.

The Taxpayer should also be aware of the Department's longstanding policy that the repair and maintenance of manufacturing equipment is a taxable activity. Title 23 VAC 10-210-920 C 2 provides that tangible personal property used to repair, service and maintain production machinery is taxable. These types of activities typically occur before or after actual production or when production stops due to the need to repair production equipment. As such, tools and equipment that are used in repair and maintenance activities are not an immediate part of production and, for this reason, are not considered to be used directly in manufacturing.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public document cited, along with other reference documents, 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3287.A

Related Documents

04-122