I run two wood-pellet fuel production plants in Virginia -- which of my machinery, conveyors, storage domes, and pollution-control equipment qualify for the sales tax manufacturing exemption?

Plain-English summary

A renewable energy company that produces wood pellets (an alternative to coal) at two Virginia plants asked the Department for an advance ruling on which of its machinery and equipment qualifies for Virginia's industrial manufacturing exemption. Raw biomass (wood mill residue, chips, logs, low-grade wood fiber) is processed into finished pellets across both sites -- Plant A does the core conversion, Plant B finishes and ships the product.

The legal framework. Sales tax exemptions are strictly construed against the taxpayer (citing Commonwealth v. Research Analysis Corp., Commonwealth v. Community MotorBus, and Golden Skillet Corp. v. Commonwealth, all 214 Va. (1973)). Va. Code § 58.1-609.3 2 iii exempts machinery, tools, fuel, power, energy, and supplies used directly and predominantly in manufacturing products for sale, but only if the business itself qualifies as an industrial manufacturer (based on its SIC/NAICS primary-business classification -- the Department noted the taxpayer hadn't provided its own classification, so this ruling assumes it qualifies). "Used directly" means an integral, indispensable, immediate part of production (Webster Brick Co. v. Dep't of Taxation, 219 Va. 81 (1978)) -- covering the full integrated manufacturing process from raw-material handling/storage through the last production step (including production-line testing/quality control), but NOT "convenient or facilitative" items (fuel tanks, platforms, structural steel, supports) or ancillary activities like plant construction -- even when those items are physically attached to otherwise-exempt machinery.

Plant A -- essentially the whole production line is exempt. The Department toured the facility and classified equipment by function:

• Raw material handling/storage: the truck scale and hydraulic truck dumper are exempt.
• Debarking/chipping: cranes, the debarking drum, the knuckleboom loader, woodchippers, and the connecting conveyor (to the extent not real property) are exempt.
• Dry processing (drying raw biomass to 5-8% moisture): the furnace fuel bin/fans/loader, metering bin, rotary dryer, collection conveyor, moisture control meter, size screens, hammermill, and dry storage bins are all exempt.
• Pellet formation: the transfer conveyor, ripening bins, and pellet press are exempt.
• The catch: legs, supports, and similar structural attachments to otherwise-exempt conveyors are NOT exempt, even though physically attached to exempt machinery -- the exemption covers only the portion of equipment actually used directly in manufacturing.

Plant B -- exempt receiving and quality-control functions, but taxable plant structures. Receiving equipment (truck scales, truck bottom dumps, transfer conveyors, to the extent not real property) is exempt, since the manufacturing exemption runs until the product is finished and moved to storage. Inside the massive 45,000-metric-ton storage domes, the air-handling and temperature-monitoring system that keeps pellets dry qualifies as exempt quality control equipment (quality control must be strict -- intended to maintain product integrity and occur on the production line, citing P.D. 93-135, P.D. 01-204, P.D. 04-71) -- but the dome structures themselves (concrete, rebar, mylar covering, and any gates incorporated into the dome as real property) are taxable plant construction. Genuinely new for this analysis: the Department held that blending different pellet batches inside the domes to meet customer specifications is a continuation of the manufacturing process, not mere storage -- drawing directly on a 1982 coal-industry ruling (P.D. 82-183) where blending different coal grades to customer spec at a terminal was likewise treated as unfinished processing. For shipping, the reclaim conveyors, belt weigh scales, metal detector, and belt magnet remain exempt as quality-control equipment (verifying quantity/quality before loading), but the further outbound conveyor, shiploader feed conveyor, and traveling shiploader conveyor are taxable -- they don't perform any quality-control or processing function, they simply move the already-finished product onto the ship.

Pollution control equipment -- no answer yet, pending certification. Separately, Va. Code § 58.1-609.3 9 and § 58.1-3660 B exempt "certified pollution control equipment," but ONLY once certified to the Department by a state certifying authority (Virginia's Department of Environmental Quality, for air pollution equipment). The taxpayer asked about cyclones, bag houses, and a wet electrostatic precipitator at Plant A, and fabric filter dust collectors at Plant B -- but without DEQ certification for this specific equipment, the Department could not conclude whether it qualifies. (Contrast this with the already-enriched P.D. 24-116, where a DEQ operating permit the taxpayer already held was accepted as sufficient certification after the fact for a completed refund claim -- here, no certification existed yet at all for this equipment.)

What this means for you

Manufacturers evaluating machinery for Virginia's industrial manufacturing exemption

Map your production line into discrete process steps (raw material handling, initial processing, formation/finishing, quality control) and evaluate each PIECE of equipment against whether it's an integral, immediate part of actually making the product -- versus a support structure, platform, or facility improvement that merely houses or enables that equipment. The legs and supports on an otherwise-exempt conveyor are a good example of how granular this distinction gets.

Businesses with in-process storage where product batches are blended, mixed, or combined to meet customer specs

If your product isn't truly "finished for sale" until you blend, mix, or combine it further (as with these pellet batches, or coal grades in the cited 1982 precedent), that blending step may extend your exempt manufacturing process into what looks like storage -- but the storage STRUCTURE itself (the building, dome, or facility) remains taxable construction.

Companies building large plant structures (domes, silos, warehouses) as part of a manufacturing facility

Expect the structure itself -- concrete, rebar, covering materials, and any building-incorporated equipment -- to be taxed as plant construction, even if it houses exempt production equipment or exempt quality-control systems inside it.

Manufacturers seeking the pollution control exemption for emissions/dust-control equipment

Get your equipment CERTIFIED by the appropriate state agency (DEQ, for air pollution equipment) before or as part of your exemption request. Without that certification, the Department cannot rule on eligibility at all -- as happened here.

Common questions

Q: My production line includes conveyors, screens, and dryers -- are all of them automatically exempt as manufacturing equipment?
A: Likely, if each is directly and immediately involved in converting raw material into your finished product. But attached supports, legs, platforms, and similar structural items are NOT exempt, even when physically attached to exempt machinery.

Q: We combine or blend different batches of our finished product before shipping to meet customer specifications -- does that count as manufacturing, or is it just storage?
A: It may count as a continuation of manufacturing, per this ruling's reliance on a coal-blending precedent -- if the product genuinely isn't ready for sale until that blending happens.

Q: We built a large storage structure that houses some exempt equipment -- is the structure itself exempt too?
A: No. Plant construction -- including materials like concrete, rebar, and covering, and any equipment incorporated as real property -- is taxable, separate from whatever exempt equipment operates inside it.

Q: Can I get a ruling on my pollution control equipment before I've obtained state certification for it?
A: Not a definitive one. The Department needs certification from the appropriate state certifying authority (like DEQ) before it can determine whether specific pollution control equipment qualifies for the exemption.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-609.3 2 iii -- exemption for machinery, tools, fuel, power, energy, or supplies used directly and predominantly in manufacturing products for sale or resale
• Va. Code § 58.1-602 -- "used directly" means activities integral to production, including all steps of an integrated manufacturing process, but not ancillary activities like general maintenance or administration
• 23 VAC 10-210-920 B 1 -- a business qualifies as an "industrial manufacturer" based on its SIC/NAICS primary-business-activity classification
• 23 VAC 10-210-920 B 2 -- the integrated manufacturing process runs from raw material handling/storage through the last production step, including production-line testing/quality control; convenient or facilitative items are not used directly even if attached to exempt machinery
• 23 VAC 10-210-920 C 2 -- plant construction is ancillary and taxable; construction materials permanently incorporated into the plant, and machinery/tools used to construct it, are taxable
• Va. Code § 58.1-609.3 9 and § 58.1-3660 B -- exemption for certified pollution control equipment and facilities, as certified to the Department by a state certifying authority such as DEQ
• 23 VAC 10-210-2090 -- pollution control equipment used primarily to abate/prevent air or water pollution is exempt once certified

Case law: Commonwealth v. Research Analysis Corp., 214 Va. 161 (1973); Commonwealth v. Community MotorBus, 214 Va. 155 (1973); Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973) (sales tax exemptions are strictly construed, with doubt resolved against the exemption claimant); Webster Brick Co., Inc. v. Dep't of Taxation, 219 Va. 81 (1978) ("used directly" requires an indispensable, immediate part of the production process).

Authorities the Department relied on (described here, not linked): P.D. 93-135 (6/4/1993), P.D. 01-204 (12/7/2001), and P.D. 04-71 (8/24/2004) (quality control equipment is exempt only if strictly intended to maintain product integrity and occurring on the production line); P.D. 82-183 (12/14/1982) (blending different product grades to customer specification is a continuation of processing, not storage) -- a coal-industry precedent extended here to wood pellet blending. This ruling's pollution control discussion relates to, but is procedurally distinct from, the already-enriched P.D. 24-116 (there, a DEQ permit already in hand was accepted as certification for a completed refund; here, no certification yet existed for the equipment at issue).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-104

Original ruling text

October 7, 2024

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will respond to the letter submitted on behalf of * (the “Taxpayer”). The Taxpayer seeks a ruling as to the applicability of the Virginia retail sales and use tax manufacturing exemption to the operations of two fuel pellet production facilities in Virginia. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer, a renewable energy company, produces wood pellets that are sold as an alternative to coal. The Taxpayer’s processing of the raw material (“biomass”), biological material derived from plants such as wood mill residue, wood chips, logs, and low-grade wood fiber, and production of the wood pellets occurs at two production facilities in Virginia, the * (“Plant A”) and the *** (“Plant B”). According to the Taxpayer, the conversion of the raw material biomass into wood pellets begins at the first production plant and is finished at a second production plant. The Taxpayer requests a ruling as to the application of the manufacturing exemption to the machinery and equipment used in its operations at both production plant sites in Virginia.

RULING

Strict Construction of Exemptions

The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the Virginia Supreme Court requires strict construction of sales tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Research Analysis Corporation , 214 Va. 161 (1973), Commonwealth v. Community MotorBus , 214 Va. 155 (1973), and Golden Skillet Corp . v. Commonwealth , 214 Va. 276 (1973).

Industrial Manufacturing Exemption

Virginia Code § 58.1-609.3 2 iii provides an exemption from the Virginia retail sales and use tax for machinery, tools, fuel, power, energy, or supplies used directly and predominantly in manufacturing products for sale or resale. In order for a business to obtain the exemption, it must be manufacturing or processing products for sale or resale and such production must be industrial in nature in accordance with the definition of manufacturing under Virginia Code § 58.1-602.

In interpreting the exemption statute, Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1, provides that a business is deemed an “industrial manufacturer” if its business classification falls within codes 20 through 39 of the Standard Industrial Classification Manual (SIC) published by the U.S. Department of Commerce. The SIC Manual has since been replaced with the North American Industrial Classification System (NAICS) Manual, which is now used by the Department to determine those industries that qualify as industrial processors or manufacturers. Both the SIC and NAICS manuals assign industrial classifications according to the primary business activity of the business. Unless the primary business activity is a manufacturing activity in accordance with these classifications, the Department does not consider the business activity to be industrial in nature.

The Taxpayer did not provide its business classification under either the SIC or the NAICS. This ruling is issued on the assumption that the Taxpayer’s classification supports qualification as industrial in nature.

Further, in order for an item of tangible personal property to qualify for the industrial manufacturing exemption, it must be “used directly” in the production process and considered to be an indispensable and an immediate part of the production process. See Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81 (1978). The term “used directly” is defined in Virginia Code § 58.1-602 as “those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing...process, but not including ancillary activities such as general maintenance or administration.”

Under Title 23 VAC 10-210-920 B 2, an integrated manufacturing process includes the production line of a plant, factory, or mill, 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 or completed for sale and conveyed to a warehouse at the same plant site. The integrated process also includes production line testing and quality control. This section of the regulation also clarifies that convenient or facilitative items or items that 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.

In addition, the Taxpayer’s plant sites make considerable use of conveyor systems. As promulgated in Title 23 VAC 10-210-920(B)(2), “[c]onvenient 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.” Thus, the legs and supports attached to an otherwise exempt conveyor are not used directly and do not qualify for the exemption. For purposes of the ruling, the exemption for the items of tangible personal property below is limited to the portion of equipment deemed to be used directly in manufacturing and would not include convenient or facilitative items that may be attached to the property.

Title 23 VAC 10-210-920 C 2, also, notes that “[a]ncillary activities such as plant construction are not part of production and are taxable. Accordingly, construction materials such as concrete, structural steel, and roofing which becomes permanently incorporated into the production plant and machinery and tools used in the construction of the plant are taxable.” As such, all materials used in the construction of the storage domes at Plant B, for example, would be taxable, including the mylar covering. The mechanized gates used to deliver product from the dome to the reclaim conveyer would be taxable, as well, if they are incorporated into the real property of the dome.

In order to provide an accurate analysis of the Taxpayer’s ruling inquiry, Department personnel toured the plant sites in order to observe the machinery and equipment at issue. This ruling will address the machinery based on their function at the plant site at which they are located. The Taxpayer’s request includes a list of property that it believes is eligible for the industrial manufacturing exemption. Each item will be addressed separately below.

Plant A

The Taxpayer’s production process at this facility is where the raw materials are received, weighed, stored, and then used in processing to produce a partially finished product that is conveyed to Plant B. The production activities at this site are categorized by the Taxpayer into four major processes: raw material handling and storage; debarking and chipping; dry processing; and formation (extrusion and cooling) of the fuel pellets.

Exempt Property Used Directly In Raw Materials Handling and Storage

• Truck Scale that weighs the logs and other raw materials upon arrival at the plant

• Hydraulic Truck Dumper that delivers waste from the chipping process to a furnace fuel reclaim system, dryer fuel bin, or chip storage pile

Exempt Property Used Directly in Debarking and Chipping Production

• Cranes that lift logs into a debarking drum

• The debarking drum that removes bark from logs

• The knuckleboom hydraulic loader that feeds debarked logs into a woodchipper

• Woodchippers that reduce logs into to chipped raw biomass

• Conveyer system from chipper to dryer to the extent it is not real property

Exempt Property Used Directly in Dry Processing

The raw material biomass must be dried to reduce the moisture content to a consistency of between 5% and 8% prior to being extruded into pellets. The Taxpayer explains that a higher moisture level would result in a product that would be more difficult for its customers to use.

• Furnace Fuel Bin, Furnace Indirect Draft Fans, and front loader equipment used to produce heat to dry raw biomass

• Metering Bin that stores raw biomass prior to drying

• Rotary Dryer that dries raw biomass chips

• Dryer Collection Conveyer Belt that moves dried biomass through size screens to the extent it is not real property

• Moisture Control Meter that monitors the moisture content of the dried biomass

• Screens that separate biomass chips by size

• Dry Hammermill Island machinery that pulverizes the larger chips separated by the Screens into suitable sizes

• Dry Storage Bins that handle and store dried biomass chips received from the Dried Chips Transfer Conveyor and Dry Hammermill Island

Pellet Formation

• Dried Chips Transfer Conveyor that to the extent it is not real property transfers the dried biomass chips to the next production phase

• Ripening Bins that measure moisture content and meter the biomass to a pellet press

• Pellet Press that uses high temperature and pressure to plasticize the chemical compounds with the chips resulting in an extruded product that will hold its form

Plant B

At Plant B, additional moisture reduction of the wood pellets is performed in order to increase quality and marketability before the final product is shipped to overseas markets. Again, the Taxpayer has broken down the production activities at this facility into the following process categories: receiving, dome storage, and shipping.

Exempt Property Used Directly In Receiving

As delineated in Virginia Code § 58.1-609.3(2) and § 58.1-602, the manufacturing exemption extends until the product is finished and transferred for storage.

• Truck Scales that weigh received wood pellets

• Truck Bottom Dumps into which the received wood pellets are dumped

• Transfer Conveyor Belts to the extent they are not real property that deliver the pellets to storage domes

Property Used In The Storage Domes

The 45,000 metric ton storage domes are structures made of concrete and rebar covered by an inflatable mylar covering. These domes are designed and equipped to keep moisture levels low and continue the drying process of the biomass pellets.

Inside of the domes are high-capacity air handling systems that aid in the evacuation of heat and maintains the pellets’ low moisture level as they await being moved for shipping. This system is triggered by temperature gauges that identify when heat levels are too high. Title 23 VAC 10-210-920 B 2 explains that the tangible personal property used in production line testing and quality control is also eligible for the exemption. It has been the long-established policy of the Department that the standard of exemption applicable to quality control is strict, such that the activities must be intended to maintain the integrity of the products being produced, and it must occur on the production line. See P.D. 93-135 (6/4/1993), P.D. 01-204 (12/7/2001), and P.D. 04-71 (8/24/2004). In the instant case, the air handling system and temperature gauges would be exempt from the retail sales and use tax.

The Taxpayer believes processing continues when the pellets are moved to the storage domes because different pellet batches are combined when they are dumped in the dome. The Department ruled on a similar issue in Public Document (P.D.) 82-183 (12/14/1982). This ruling address a coal processing activity in which coal of different grades is combined and mixed to customer specification at a terminal site. The Department ruled this constituted a continuation of processing because of the coal grade mixing, as the coal was not prepared for sale to the customer until this mixing was completed. The Taxpayer argues the blending of different pellets should be eligible for the same treatment. Based on the Taxpayer’s explanation that different grades of pellets are blended to meet customer standards, it would meet eligibility requirements for the exemption.

Property Used In Preparation for Shipping

When sold, the pellets are discharged via mechanized gates for shipping through reclaim conveyors equipped with belt weigh scales, a metal detector, and belt magnet to ensure the proper amount and quality of material being moved toward the ship. The pellets are fed onto an outbound conveyor and deposited onto a shiploader feed conveyor that will deposit product on a travelling shiploader conveyor to load them onto marine bulk holding ships. Citing the quality control exemption above, the reclaim conveyors, belt weigh scales, metal detector, and belt magnet would qualify for the exemption. The outbound conveyor, shiploader feed conveyor, and travelling shiploader conveyor do not perform any quality control or processing functions as described in the ruling request letter, are not used directly in the manufacture of tangible personal property for sale or resale in the industrial sense and, therefore, do not qualify for the manufacturing exemption.

Pollution Control Exemption

Virginia Code § 58.1-609.3 9 provides an exemption from the sales and use tax for “[c]ertified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section.” Virginia Code § 58.1-3660 B then defines certified pollution control equipment and facilities to include “solar energy equipment, facilities, or devices owned or operated by a business that collect, generate, transfer, or store thermal or electric energy whether or not such property has been certified to the Department of Taxation by a state certifying authority.” Virginia’s current state certifying authority for certifying air pollution equipment is the Department of Environmental Quality (DEQ).

Title 23 VAC 10-210-2090 addresses the sales and use tax exemption for pollution control equipment and facilities. Subsection B states that any property that is certified as used primarily for abating or preventing air or water pollution is not subject to the sales and use tax. Pursuant to the regulation, qualifying property includes real or tangible personal property, equipment, facilities or devices used primarily for the purpose of air or water pollution abatement or prevention. Without a certification from DEQ, the Department is unable to conclude whether the equipment listed below is eligible for the pollution control exemption:

• Plant A: Cyclones, Bag Houses, and a Wet Electrostatic Precipitator that removes particulates and pollutants from exhaust discharged back into the environment from the Rotary Dryer.

• Plant B: Fabric Filter Dust Collectors that control particulate emissions during transfers.

This ruling is based on the facts provided as provided by the Taxpayer and summarized above. Any change in facts or the introduction of new facts may lead to a different result. In addition, the eligibility of the various items of property are specific to their use in this Taxpayer’s manufacturing process. The same or similar equipment used in a different process may or may not be eligible for the industrial manufacturing exemption.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at 804. or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/694.Z

Related Documents

82-183

93-135

01-204

04-71