Tax Type
Retail Sales and Use Tax
Description
Manufacturing Exemption
Topic
Exemptions
Property Subject to Tax
Date Issued
06-20-2001
June 20, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period of December 1996 through January 1999. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a retail bakery that bakes its own bread and bagels for sale at retail, along with made to order sandwiches. All sales made by the Taxpayer are for carryout only, as there is no seating available at the Taxpayer's location. The Taxpayer made limited wholesale sales to retailers at the beginning of the audit period, but has since discontinued this practice. Wholesale sales comprised only 10 percent of the total sales made by the Taxpayer during the audit period.
The Taxpayer was audited and assessed tax on all kitchen equipment used in its bakery operation. The Taxpayer purchased all the equipment under the assumption that it is an industrial manufacturer and all equipment is exempt under the manufacturing and processing exemption found under Code of Virginia § 58.1-609.3. The Taxpayer is appealing the audit assessment.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides a sales and use tax exemption for "machinery or tools or repair parts therefor or replacement thereof... used directly in processing, manufacturing... products for sale or resale." The department and the courts have traditionally limited the manufacturer's exemption to manufacturing processes that are industrial in nature. Title 23 of the Virginia Administrative Code (VAC) 10-210-920.B (copy enclosed) provides that "establishments which manufacture... tangible personal property as an incidental part of a retail establishment... are generally deemed to be engaged in non-industrial activities." (Emphasis added). This regulation goes on to provide that establishments of this type include restaurants and similar retail food operations which process food products primarily for direct sale on the premises to consumers.
The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), interpreted the manufacturing exemption to apply to machinery and tools used in manufacturing products for sale or resale when used in the industrial sense. The court determined in Golden Skillet that restaurants which prepare fried chicken for sale at retail are not industrial operations and are not entitled to the industrial manufacturing exemption.
Code of Virginia § 58.1-602 states that the term "industrial in nature" shall include all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual." A review of the SIC Manual reveals that "establishments primarily engaged in the retail sale of bakery products... made on the premises" are classified under SIC Code 5461 - Retail Bakeries (Cross referenced with Industry Group 311811 of the North American Industry Classification System, U.S. 1997). Accordingly, the Taxpayer's activities are not considered "industrial in nature."
Based on all of the above, I find that the Taxpayer's operation does not qualify for the industrial manufacturing or processing exemption, and the audit assessment is proper. Please forward full payment of the outstanding audit liability in the amount of *****, within 30 days from the date of this letter. Payment may be sent to ***** Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you should have any questions, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25684K
COMMONWEALTH of VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner