Administrative Code

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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 210. Retail Sales and Use Tax

23VAC10-210-920. Manufacturing and processing.

A. Generally. The retail sales and use tax does not apply to the following types of tangible personal property when used or consumed by an industrial manufacturer or processor of products for sale or resale: (As used in this section, the terms "manufacturing and processing" include "converting.")

1. Industrial materials for future manufacturing or processing 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;

2. Industrial materials that are coated upon or impregnated into the product at any stage of its manufacture or processing;

3. Machinery, tools or repair parts, fuel, power, energy, or supplies used directly in manufacturing or processing.

4. Materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable);

5. Tangible personal property purchased for use or consumption directly and exclusively in basic research in the experimental or laboratory sense or research and development in the experimental or laboratory sense (see also 23VAC10-210-3070 through 23VAC10-210-3074);

6. Gas, electricity or water received through mains, lines, or pipes;

7. Tangible personal property used directly in those necessary ancillary activities of newspaper and magazine printing when such activities are performed by the publisher of any newspaper or magazine for sale daily or regularly at average intervals not exceeding three months and any newspaper or magazine for distribution at no cost published daily or regularly at average intervals not exceeding three months.

Unless otherwise specified, only the types of tangible personal property listed above may be purchased exclusive of the tax by an industrial manufacturer or processor for direct use in producing products for sale or resale. Other production items and items of tangible personal property used indirectly in production activities are deemed subject to the tax.

Based upon the foregoing, for a business to obtain the exemption, it first must be manufacturing or processing products for sale or resale and secondly, such production must be industrial in nature. The determination of whether an operation is industrial in nature shall be made without regard to plant, size, finished product inventory size, degree of mechanization, amount of capital investment, number of employees or other factors relating principally to size. Third, the types of tangible personal property which may be purchased exclusive of the tax by an industrial producer are machinery and tools, raw materials or one of the other types specifically set forth above, and fourth, such types of tangible personal property must be used directly in the manufacturing or processing operation. In addition, the statutory definitions of "manufacturing" and "processing" under the Retail Sales and Use Tax Act limit the industrial exemption to activities conducted at a single plant site (see also subdivision B 2 of this section).

B. Definitions.

1. Industrial manufacturer and industrial processor. Industrial manufacturers include establishments engaged in the mechanical or chemical transformation of materials or substances into new products.

Industrial processors include establishments engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable. Products need not undergo a change in state or form in order for an establishment to be classified as an industrial processor.

These establishments (hereinafter referred to as "industrial manufacturers") are usually described as plants, factories or mills and characteristically use power driven machines and materials handling equipment. The production activities of such establishments are usually carried on for the wholesale market or to order for industrial users, rather than for direct sale to domestic consumers. The term "industrial manufacturer" as used herein shall include but not be limited to businesses classified or substantially similar to other businesses classified in codes 20 through 39 of the Standard Industrial Classification (hereinafter "SIC") Manual published by the U.S. Department of Commerce.

Establishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities. Establishments of this type include retailers such as restaurants, caterers, meat and fish markets, and candy, nut, and confectionery stores which process food products primarily for direct sale on the premises to consumers. Such non-industrial establishments also include individuals engaged primarily in providing personal services such as photographers, artists, tailors, and seamstresses.

2. Used directly. The term "used directly" refers to those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration.

The integrated manufacturing process noted above includes the production line of a plant, factory, mill, etc., 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, and also includes production line testing and quality control. Tangible personal property used in activities conducted away from the plant site or used to convey products or materials between two plant sites is deemed not to be used directly in manufacturing or processing.

The concept of the integrated manufacturing process includes within the scope of the manufacturing and processing exemption machinery, tools, repair parts, fuel, power, energy and supplies used directly to manufacture or process fuel, power or energy used to run exempt production machinery or to manufacture exempt production machinery, tools or supplies. In essence, an exemption is available for subprocessing activities which produce tangible personal property used directly in the main manufacturing or processing activity.

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. 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.

C. Manufacturing and processing activities. The activities involved in manufacturing and processing are divided into "administration," "production," and "distribution." Descriptions of these activities and examples of taxable and exempt tangible personal property used in each are listed below:

1. "Administration" is the managerial, sales, and nonoperational aspects of manufacturing and processing operations and includes management, selling and marketing, employee comfort and convenience, and record keeping. Tangible personal property used in administration is subject to the tax. Such property includes:

Office furniture, supplies and equipment, textbooks and other educational materials, books, and records, and all other items used in record keeping and other administrative or managerial activities, whether on or off the assembly line. Also included are computer hardware and canned software, calculators, and other such items used to record the quality and quantity of work in production or goods in storage, the flow of work, and the results of inspections;

Tangible personal property used for the personal comfort, convenience or use of employees, including items used in employee lounges, restrooms, etc.; and

Tangible personal property used for employee payroll and customer billing, purchasing records, etc.

2. "Production" includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site.

Ancillary activities such as plant construction are not a 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.

Steel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax. However, concrete floors or foundations on which such supports rest or to which machinery is bolted, and structures housing machinery are not used directly in manufacturing and processing and are subject to tax.

Equipment used for production line testing or quality control is classified as exempt production equipment. Testing for the purpose of improving administrative efficiency or any other testing not relating to quality control is taxable.

Replacement and repair parts which are used to replace worn or damaged parts on exempt machinery and equipment, as well as operating supplies which are actively and continually consumed in the operation of exempt machinery and equipment, are deemed used directly in manufacturing or processing and are not subject to the tax.

Machinery and tools used by the person engaged in manufacturing or processing to manufacture exempt machinery, equipment, or supplies are exempt from the tax only to the extent that they are used in such manufacture. For information on the application of the tax to items used in both a taxable and exempt manner, see subsection D of this section.

Examples of taxable and exempt production items are listed below:


Tangible personal property used to transport raw materials to a plant site;

Tangible personal property used to prevent or fight fires, and equipment and supplies used for such programs as safety, accident prevention, and first aid;

Tanks used to store exempt fuel and other tangible personal property except that tanks and other devices which constitute machinery are exempt;

Tangible personal property used for general plant lighting, heating, air conditioning, ventilation, etc., unless such property is specifically designed to protect the integrity of products;

Demurrage charges for the use of cylinders in which exempt gases are stored;

Tangible personal property used to dispose of plant wastes and pollutants other than equipment designated as certified pollution control equipment under the provisions of § 58.1-3660 of the Code of Virginia;

Materials and apparatus used to support exempt production machinery, including flooring, concrete and metal platforms, etc., except supports or legs which are a component part of exempt production machinery and do not become affixed to realty;

Tangible personal property used in the repair, servicing, and maintenance of production machinery; however, replacement parts for exempt production machinery are exempt from the tax;

Catwalks, walkways, etc., regardless of whether used to provide access to production machinery for the operation, maintenance or repair of such machinery;

Materials used in constructing, paving or maintaining roadways on the plant site on which exempt production vehicles travel.


Tangible personal property used to test and inspect products on the production line for quality control purposes;

Computer hardware and software used to direct or control production line and/or quality control operations (as contrasted to computer hardware and software used merely to monitor production operations, e.g., computers used to produce production reports, make production information available to plant personnel, monitor the efficiency of production machinery, etc., which are deemed to be taxable administrative items);

Wrapping or packaging equipment and supplies used at the plant site in packaging products for sale or resale;

Tangible personal property, used on the plant site, to unload raw materials or to convey raw materials to storage or from storage to the production line, to convey products from one step of production to another, or to convey finished products to packaging or warehouse areas; and

Safety apparel furnished gratuitously by manufacturer to production line employees; however, safety apparel furnished to non-production line employees is taxable as are sales of such items to employees.

3. "Distribution" is the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the storage of a product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale. All tangible personal property used to convey, transport, handle, store, market or display finished products is taxable. Such property includes:

Tangible personal property used to remove or load finished (packaged) goods from storage at the plant site;

Tangible personal property used to transport manufactured products to market or customers;

Tangible personal property used in advertising or marketing manufactured products for sale; including salesmen's samples withdrawn from a manufacturer's inventory;

Tangible personal property used in the exhibition of manufactured products; and

Tangible personal property (other than containers) used to protect manufactured products from damage during shipment to market or customers.

D. Machinery, tools, etc., used both in taxable and exempt production activities. When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt production activities.

E. Correct use of exemption certificates. In making purchases for use in production, an industrial manufacturer should furnish his vendors with the applicable certificate of exemption. However, these certificates should not be utilized in making purchases for use in administration, maintenance of plant or building, or distribution. The tax must be paid on purchases for these purposes even when the vendor is holding blanket certificates of exemption filed by the vendee. If an industrial manufacturer gives a certificate of exemption and then consumes some of the property purchased for purposes other than production, he must report as taxable receipts the cost to him of the property consumed in administration, maintenance of building or plant, or distribution.

F. Direct payment permits. An industrial manufacturer may apply for a direct payment permit (see 23VAC10-210-510) when it is not possible at the time tangible personal property is purchased to know how it will be used. When such a permit is issued by the Department of Taxation, a manufacturer may file copies of the permit with vendors and pay directly to the department any tax that is due based on the use made of the purchases. No such permit, however, can be issued unless it is conditioned upon an arrangement under which no county or city will suffer the loss of any local sales or use tax revenue by reason of the issuance of the permit.

For manufacturers and processors who produce tangible personal property both for sale or resale and for their own use in performing real property construction contracts, see 23VAC10-210-410 E. For purchases of exempt machinery by contractors, see 23VAC10-210-410.

Statutory Authority

§§ 58.1-203 and 58.1-609.3(2) of the Code of Virginia.

Historical Notes

Derived from VR630-10-63; revised, eff. January 1, 1985.

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