Document Number
03-71
Tax Type
Retail Sales and Use Tax
Description
Classifying a business as industrial, manufacturing
Topic
Exemptions
Date Issued
10-15-2003
October 15, 2003



Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you request reconsideration of the Department's determination letter of May 2, 2002, issued to your client, ***** (the "Taxpayer"). The appeal in question covers the audit period February 1998 through July 2000. I apologize for the delay in the Department's response.
FACTS

The Taxpayer operates a restaurant with an on-site micro-brewery. The Department's prior determination upheld the assessment of brewing equipment purchased for use at the Taxpayer's restaurant. The Taxpayer argues against the Department's position that, while the process of brewing beer is an industrial process, the Department classifies the activities as being industrial in nature only when off-premises sales exceed 50 percent of the total beer sales. The Taxpayer asserts that its operation is both a restaurant and a brewery and these activities should be treated separately. Further, the Taxpayer points out that brewing of beer is listed under Code 2082 in the Standard Industrial Classification (SIC) Manual, which includes establishments primarily engaged in manufacturing malt beverages. Based on this classification, the Taxpayer claims that its brewery is entitled to the industrial manufacturing exemption.
DETERMINATION

Standard Industrial Classifications

Virginia Code § 58.1-602 provides that "industrial in nature" includes, but is not limited to, those businesses classified in codes 10 through 14 and 20 through 39 published in the SIC Manual. Title 23 of The Virginia Administrative Code (VAC)10-210-920(B)(1) explains that "[e]stablishments which manufacture ... tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities."

To qualify for the manufacturing exemption, a taxpayer's manufacturing process must be industrial in nature. In this case, the Taxpayer's brewing machinery and equipment were held taxable because the Taxpayer's operation does not qualify as "industrial in nature" in accordance with the cited statutes and regulation. According to the auditor, more than 50 percent of the Taxpayer's beer sales are for direct sale on the premises to consumers (a nonindustrial activity, as noted in Title 23 VAC 10-210-920). Further, 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 beverages). Since 1983, these classifications have served as the primary determination for classifying a business as "industrial." The determination in this case is consistent with prior determinations of the Department that address the same issue. See Public Documents 96-250 (9/27/96) and 99-112 (5/14/99).

Court Cases

Although you cite Caffee v. City of Portsmouth, 203 Va. 928 (1962) in support of your case, I must note a critical distinction between Caffee and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973). The decision in Golden Skillet emphasizes manufacturing in the "industrial sense." This is not the case in Caffee.

As the court stated in Golden Skillet, the Caffee decision does not address whether Caffee's bakery operation was manufacturing in the industrial sense. Rather, the Caffee decision only confirms that Caffee's bakery is a manufacturer for local license tax purposes. Moreover, the court in Golden Skillet concluded that the Caffee decision "is not persuasive" in the Golden Skillet case.

For sales and use tax purposes, the manufacturing exemption is narrower. There must be manufacturing and that manufacturing must be industrial in nature. The Golden Skillet case emphasizes this distinction between "manufacturing" for local license tax purposes and "industrial manufacturing" for sales and use tax purposes.

In Commonwealth v. Orange-Madison Cooperative Farm Service, 220 Va. 655 (1980), the Virginia Supreme 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 would not be denied merely because the processed goods are sold at retail as opposed to wholesale. The focus should be upon the nature of the process rather than the nature of the sale.

As explained in the Department's prior response, 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.

Preponderance of use

Title 23 VAC 10-210-920(D) explains that when a single item of tangible personal property is used in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other which is not (taxable), the sales and use tax will apply in full when the preponderance of the item's use (fifty percent or more) is in nonexempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt industrial production activities. Because more than 50 percent of the Taxpayer's beer sales are for direct sale on the premises to consumers (a nonindustrial, taxable activity), the preponderance of the brewing equipment's use is in a taxable activity. In accordance with Title 23 VAC 10-210-920(D), tax applies in full on the total purchase price of the brewing equipment.

Conclusion

Based on the above, I find no basis for revising the assessment. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter. The Taxpayer should remit full payment to the Department's Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23282-1880, Attn:*****.
    • The Code of Virginia sections and regulations cited, along with other reference
documents, are available on-line 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 matter, please contact ***** at *****.
                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner


AR/42034T

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46