Tax Type
Retail Sales and Use Tax
Description
Tax on the brewing equipment used in a restaurant
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
05-02-2002
May 2, 2002
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 your client, ***** (the "Taxpayer"), for the period February 1998 through July 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a restaurant with an on-site micro-brewery. The beer brewed by the Taxpayer is for consumption on the premises. As the result of a retail sales and use tax audit, the Taxpayer was assessed tax on the brewing equipment used at the restaurant. The Taxpayer believes the brewing equipment qualifies for the manufacturing exemption under Code of Virginia § 58.1-609.3(2), based on Commonwealth v. Orange-Madison Cooperative Farm Service, 220 Va. 655, 261 S.E.2d 532 (1980). The Taxpayer is requesting that the brewing machinery and equipment be removed from the audit.
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." To qualify for this exemption, a taxpayer's manufacturing process must be industrial in nature. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 (copy enclosed) provides that "establishments which manufacture . . . tangible personal property as an incidental part of a retail or service business 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 that process food products primarily for direct sale on the premises to customers.
The above statute was interpreted by the Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), in which the court held that the exemption was available only for processors of products for sale or resale in the industrial sense. The court determined in Golden Skillet that restaurants that prepare fried chicken for sale at retail were not industrial operations and were not entitled to the industrial manufacturing exemption.
In Orange-Madison, the court noted that not all processing qualifies for the industrial manufacturing exemption. Rather, the exemption is limited to processing operations that are industrial in nature. The court stated that the exemption shall not be denied merely because the process goods are sold at retail as opposed to wholesale, but the focus should be upon the nature of the process rather the nature of the sale.
Code of Virginia § 58.1-602 provides that "industrial in nature" shall include, but not be limited to, those businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual. The Taxpayer's primary activities do not fall within codes 10 through 14 or 20 through 39, but rather code sections 5812 (Eating Places) and 5813 (Drinking Places, specifically alcoholic beverage).
In the present case, the Taxpayer's brewing machinery and equipment were held taxable not because the nature of the sale of the product was retail, but because the Taxpayer's brewing operation does not qualify as "industrial in nature" in accordance with the cited statutes and regulation. This position is supported by the Taxpayer's classification in the SIC Manual as a retail establishment and by Public Document 96-250 (9/27/96).
Based on the above, I find no basis for revising the audit. Copies of the Code of Virginia, regulations and documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/33169K
Rulings of the Tax Commissioner