A taxpayer in Virginia was entitled to a refund for paid sales and use tax on testing equipment. The Virginia Tax Commissioner determined the taxpayer was eligible for a manufacturing exemption because the testing equipment was used within the manufacturing process.
The taxpayer is a manufacturer of electronic components. The taxpayer filed for a refund of sales tax on their purchases of testing equipment, citing that as it was involved in the manufacturing process, the equipment was exempt. According to Virginia Code §58.1-609.3 2, property purchased for direct use in a manufacturing process is exempt from sales and use tax.
The definition of testing in Virginia contains some important nuances. Title 23 VAC 10-210-920 C 2 deems equipment involved in production line testing or quality control exempt. However, equipment involved in testing administrative efficiency is not exempt.
The Virginia Department of Taxation denied the taxpayer’s request for a refund on the grounds that the equipment was used for testing finished products. The taxpayer contested this denial and submitted information about the equipment used and their manufacturing product, which showed the testing equipment was involved in the manufacturing process.
As opposed to other processes that feature testing after the manufacturing process has concluded, the taxpayer was able to prove that testing occurred before the products were placed in their packaging and labeled. Because of the order of use within the manufacturing process, the testing equipment was eligible for the exemption.
This case underlines the importance of detailed record-keeping and careful documentation of your processes. Because the taxpayer was able to prove the testing equipment was involved in the manufacturing process and not used to test finished products, the taxpayer was entitled to a refund.
(Ruling of Commissioner, P.D. 24-69, Virginia Department of Taxation, July 9, 2024)