TECHNICAL ASSISTANCE ADVISORY95-005
SUBJECT: Consumers SalesTax -- Exemptions-- Application of direct use in manufacturing exemption to purchasesby manufacturer for use or consumption in building a manufacturingfacility -- Code § 11-15-8d held not to apply under thesefacts.
Your letter of March 4, 1994,requests on behalf of your client issuance of a technical assistanceadvisory under W. Va. Code § 11-10-5r, regarding applicationof the direct use in manufacturing exemption in the consumerssales and use tax laws to construction of a manufacturing facilityby Contractor that will be owned by Limited Partnership. YourMarch 4, 1994, letter is supplemented by letters dated May 19,1995, and August 3, 1995, and with certain documents attachedto your letter of May 19, 1995.
FACTS
Contractor will enter into aconstruction contract with Limited Partnership under which Contractorwill construct a manufacturing facility that uses Contractor'sproprietary process, technology and equipment, and then operateit during a start-up period. Contractor's wholly owned subsidiaryhas a substantial ownership and managerial interest in LimitedPartnership.
Contractor will appoint a projectmanager as the overall supervisor of construction. Limited Partnershipwill appoint its own representative to oversee the work of Contractorand consult on the day-to-day construction of the facility. LimitedPartnership will also appoint an independent consulting engineerto review the work performed by Contractor.
Under the construction contract,Limited Partnership has the right to directly procure tangiblepersonal property and/or services that will be used in constructingand equipping the manufacturing facility. The parties anticipatethat purchase orders in the name of Limited Partnership will beprepared by or under the Contractor's direction and submittedto Limited Partnership for review and execution by its representative. This representative will either be a partner or an employee ofLimited Partnership who has an extensive background in the industryand the expertise necessary to make independent decisions regardingthe items, specifications and terms set forth on the purchaseorder.
Payments to vendors and suppliersof tangible personal property or services purchased by LimitedPartnership will be made from the construction fund, in whichproceeds from the sale of industrial revenue bonds and equitycontributions of partners or principals of Limited Partnershipwill be deposited. Requisitions out of this construction fundmust be approved by Limited Partnership's consulting engineer.
Warranties for tangible personalproperty and services purchased by Limited Partnership will befor the benefit of Limited Partnership and will be enforceableby it, not by Contractor. Contractor will warrant only materials,labor, parts and workmanship it supplies. According to your letterof August 3, 1995, materials purchased by Contractor will be limitedto incidental items such as tape, screws, nails and other smallconstruction items, the cost of which, in the aggregate, willconstitute only a very insignificant percentage of the total costof all tangible personal property purchased for use or consumptionin construction of the facility. Contractor will design and constructthe facility using its proprietary technology which incorporatesits proprietary process, manufacturing equipment and components.
Limited Partnership requestsissuance of a technical assistance advisory which holds that purchasesof tangible personal property or services, as described above,by Limited Partnership for use or consumption in constructingand equipping the facility will be exempt from consumers salesand use taxes under the direct use in manufacturing activity exemptionin W. Va. Code §§ 11-15-9(g) and 11-15A-3(a)(2). LimitedPartnership also requests a ruling that the structure of the transaction,as described above, will result in purchases on purchase ordersreviewed and executed by a representative of Limited Partnershipbeing purchases of Limited Partnership, rather than purchasesof the Contractor under W. Va. Code § 11-15-8d and section110-15-19 of administrative regulations for the consumers salesand use taxes.
DISCUSSION AND ANALYSIS
A partner or employee of LimitedPartnership will be designated to oversee the work of Contractorand to consult on the day-to-day construction of the facility. Purchases of construction materials and equipment to be incorporatedinto the facility, and purchases of services to be used in constructionof the facility will be purchased on purchase orders of LimitedPartnership that are reviewed and executed by the representativeof Limited Partnership. This representative will have an extensivebackground in the industry and the expertise necessary to makeindependent decisions regarding the items, specifications andterms set forth on the purchase orders. These purchases willbe invoiced directly to Limited Partnership and will be paid fromLimited Partnership's construction fund, after the invoice isapproved for payment by Limited Partnership's consulting engineer.Warranties on items purchased from vendors on purchase ordersof Limited Partnership will run to Limited Partnership and willbe enforced by it, not by Contractor. Additionally, these warrantieswill not be subject to assignment to Contractor.
Under these facts, Limited Partnershiphas substantial oversight responsibility with regard to reviewof construction plans, purchases for construction, inspectionof the facility, and inspection of particular items of equipmentand machinery to be incorporated into the facility. Tangiblepersonal property to be incorporated into the facility will actuallybe purchased by Limited Partnership, invoiced to Limited Partnershipand paid for by Limited Partnership from its funds. Additionally,there is a close identity between Limited Partnership and Contractorbecause a wholly owned subsidiary of Contractor has a significantownership and managerial interest in Limited Partnership.
CONCLUSIONS
Based upon facts submitted forpurposes of this ruling, the Tax Commissioner hereby finds andrules that Limited Partnership may claim the exemptions from theconsumers sales and use taxes set forth, respectively, in W. Va.Code §§ 11-15-9(g) and 11-15A-3(a)(2) for purchasesof tangible personal property or services by Limited Partnership,as described above, that will be directly used or consumed inthe activity of manufacturing. This exemption does not applyto purchases of office equipment or other tangible personal propertyor services that will not be "directly used or consumed"in the activity of manufacturing, as defined in W. Va. Code§ 11152(d).
The Tax Commissioner also findsand rules that purchases made by Limited Partnership, in accordancewith the above described procedures, comply with the requirementsof W. Va. Code § 11-15-8d and section 1101519of regulations for the consumers sales and use taxes, and preservefor Limited Partnership the exemptions from consumers sales anduse taxes for purchases of tangible personal property or servicesthat are "directly used or consumed" in the activityof manufacturing, as defined in W. Va. Code § 11-15-2(d).
These exemptions do not apply,however, to tangible personal property or services purchased byContractor which are resold to Limited Partnership, incorporatedinto the facility, or used in construction of the facility. Additionally,these exemptions do not apply to any tangible personal propertyor portion of the facility that is warranted by Contractor toLimited Partnership, or to any tangible personal property or portionof the facility on which Contractor holds a warranty interestas warrantee. Notwithstanding the preceding, Contractor may warrantthe quality of workmanship and labor it provides to Limited Partnershipin construction of the facility and installation of equipment.
Conclusions reached in thistechnical assistance advisory are based upon facts furnished byLimited Partnership. In the event material facts have been omittedor these facts change in a material way, or there is a materialchange in applicable law, the conclusions reached in this advisorymay no longer apply.
Declaration of PrecedentialValue. -- Under W.Va. Code § 11-10-5r(b), a technical assistance advisory hasno precedential value except to the taxpayer who requests theadvisory, unless the Tax Commissioner specifically states thatit has precedential value. Due to the specialized nature of thefacts and question presented here for ruling, this technical assistanceadvisory has no precedential value except to this taxpayer, andmay not be relied upon by any person other than this Contractorand this Limited Partnership.
Publication.-- The Tax Commissioner is required by W. Va. Code § 11-10-5r(e)to release technical assistance advisories to the public afterthey are modified to delete identifying characteristics. Thisadvisory will be released as Technical Assistance Advisory 95-005.
If you have any questions aboutthis advisory, please contact this office at your earliest convenience.
Issued: November 29, 1995 James H. Paige III
Secretary/Tax Commissioner