Tax Type
Retail Sales and Use Tax
Description
Request for Reclassification as Industrial Processor for Sales Tax Purposes
Topic
Basis of Tax
Taxability of Persons and Transactions
Date Issued
10-31-2001
October 31, 2001
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you request a ruling regarding the application of the retail sales and use tax to your operations. I apologize for the delay in responding to your letter.
FACTS
***** (the "Taxpayer") is a distributor of industrial rubber and rubber-related products (such as belting, industrial hoses and fittings, rubber gloves, protective footwear, etc.). In one transaction you describe, the Taxpayer purchases conveyor belting in bulk. Per a customer's order, the Taxpayer will cut the belting down to the required width and length. The belts are then taken to the customer's plant site and spliced to the customer's existing belt system. Splicing may be done using fasteners, adhesives, or via vulcanization. The Taxpayer also uses specialized equipment to wind up the customer's old belts, replacing the worn or used portion.
The Taxpayer states that although it does not manufacture any product at its location, it does assemble or process its products to make them complete for the customer's end use. Further, while some items are purchased from its vendors complete for resale, many items are "actually a component needed to complete the end product or service ...."
In a number of sales and use tax audits, the Taxpayer was deemed to be fabricating tangible personal property for sale or resale. The Taxpayer requests that it be classified as an industrial processor for sales and use tax purposes.
RULING
Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacements thereof ... used directly in processing, manufacturing, refining, mining or converting products for sale or resale." Such property may be purchased exempt of the tax by an industrial manufacturer or processor for direct use in producing products for sale or resale. See Title 23 of the Virginia Administrative Code (VAC) 10-210-920, copy enclosed.
In Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), the Virginia Supreme Court held that the manufacturing exemption was intended to exempt machinery and tools used in manufacturing products for sale or resale only "in the industrial sense." Further, for purposes of the manufacturing exemption, the term "industrial in nature" is defined in Code of Virginia § 58.1-602 to include, "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual ...."
Generally, businesses engaged in manufacturing and classified under the proper SIC codes are involved in transforming raw materials into useful and marketable products within a factory, plant or mill environment using power-driven machinery and materials handling equipment. Manufacturing production is usually carried on for the wholesale market, for interplant transfer, or "to order" for industrial users, rather than for direct sale to the domestic consumer. In this instance, the Taxpayer does cut belting "to order" for an industrial customer, but there is no creation of the belting from raw materials in an industrial sense.
Rather, it appears that the Taxpayer's classification more appropriately falls under Major Group 50 (Wholesale Trade) and Industry No. 5085, which is the wholesale distribution of industrial supplies, including hoses, belting and rubber goods to industrial users. This classification also encompasses the Taxpayer's sales of its "resale" items, such as rubber gloves, PVC footwear and other safety clothing.
Accordingly, I do not find that the Taxpayer is manufacturing in "an industrial sense." If you should have any questions regarding this matter, please contact ***** of the department's Office of Policy and Administration, Appeals and Rulings, at ****** or at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/28087Q
Rulings of the Tax Commissioner