Document Number
04-209
Tax Type
Retail Sales and Use Tax
Description
Classification of Manufacturing Business
Topic
Manufacturing Exemption
Date Issued
11-30-2004

November 30, 2004


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 assessment issued to ***** (the "Taxpayer") for the period June 1999 through May 2002. I apologize for the delay in the Department's response.
FACTS

The Taxpayer is engaged in the sale of paint and paint related products on a retail and wholesale basis. The Taxpayer's retail store locations are equipped with equipment that mixes colorants with base paints to create tinted paints. The Taxpayer was assessed tax on the purchase of equipment used to create, dispense, and blend the liquid colorants to produce the tinted paint. The Taxpayer contends that the equipment is used directly and primarily in the manufacture of paint for sale and qualifies for the manufacturing exemption. The Taxpayer also requests a refund of the tax accrued and remitted to the Department on prior purchases of such equipment.
DETERMINATION

Manufacturing Exemption

Virginia Code § 58.1-609.3 2(iii) provides an exemption from the retail sales and use tax for:
    • machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale.

Manufacturing Activity

In order to determine if the Taxpayer is entitled to the manufacturing exemption, it must first be determined whether the equipment used in the colorant operation by the Taxpayer constitutes a manufacturing or processing activity. Virginia Code § 58.1-602 provides that manufacturing or processing:
    • 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, and also includes equipment and supplies used for production line testing and quality control.

In this case, the equipment is used to create, dispense, and mix colorants with base paints to create tinted paints for sale. Pursuant to Va. Code § 58.1-602, the equipment is used by the Taxpayer in a processing activity.

Incidental v. Nonincidental Part of Retail Business

It must next be determined whether the manufacturing activity constitutes an incidental part of the Taxpayer's retail business. Title 23 of the Virginia Administrative Code ("VAC") 10-210-920 provides that for a business to obtain the manufacturing exemption, it must be (1) manufacturing products for sale or resale, and (2) such production must be industrial in nature. Section B 1 of this regulation specifically states, "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." [Emphasis added].

In Public Document ("P.D.") 94-359 (11/28/94), the Department stated:
    • In determining whether manufacturing or processing activities are an incidental part of the retail or service business, the department considers the primary purpose of the retail business. Manufacturing and processing activities may be necessary to the retail operations and yet still be considered incidental.

In this instance, the Taxpayer has a retail business in which it sells paint and paint related products. The primary purpose or the predominant nature of its retail business is to sell these items to customers. While the processing of the colorants is necessary for the sale of tinted paint, these activities are incidental to the Taxpayer's retail business.

Industrial v. Nonindustrial in Nature

Virginia Code § 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 published in the Standard Industrial Classification Manual for 1972 and any supplements issued thereafter.

In P.D. 02-32 (3/15/02), the Department concluded that it was necessary to make a determination of the predominant nature of the taxpayer's sales in establishing whether the taxpayer was an industrial manufacturer or a retailer pursuant to the Standard Industrial Classification (SIC) Manual.

In this case, the Taxpayer's activities do not fall within codes 20 through 39, but rather are classified in code 5231, which encompasses “[e]stablishments primarily engaged in the retail sale of paint, glass, and wallpaper . . . to the general public." Accordingly, the Taxpayer is a retailer and not an industrial manufacturer pursuant to the SIC Manual.

Further, the Virginia Supreme Court addressed the manufacturing and processing exemption in Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 198 S.E.2d 219 (1973). In this case, the Court ruled that the exemption is available only to true manufacturers or industries. Further the exemption applies to machinery, tools, and supplies used directly in the manufacturing or processing of products for sale or resale only in the industrial sense.

Although you cite Caffee v. City of Portsmouth, 203 Va. 928 (1962), Prentice v. City of Richmond, 197 Va. 724 (1956), and County of Chesterfield v. BBC Brown Boveri, Inc., 238 Va. 64 (1989) in support of your case, I must note a critical distinction between these cases and Golden Skillet. 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. As in Caffee, the Court's decisions in Prentice and Brown Boveri only confirm whether the taxpayer's operation is manufacturing for local license tax purposes and do not address whether the taxpayer's operation is manufacturing in the industrial sense.

For sales and use tax purposes, there must be manufacturing or processing that is 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.

The Taxpayer's situation is analogous to that of the taxpayer in Golden Skillet. In accordance with the provisions of Title 23 VAC 10-210-920, the Taxpayer is not an industrial manufacturer or an industrial processor. The activities conducted by the Taxpayer, with respect to the colorant operation, are an incidental part of its retail business and are deemed nonindustrial activities. Accordingly, the Taxpayer does not qualify for the industrial manufacturing exemption in Va. Code § 58.1-609.3 2.

Conclusion

Based on this determination, the assessment is correct. While you request a conference in your letter, your request is declined because the Department's policy with respect to the industrial manufacturing issue is well established in the court decisions, regulations and several prior rulings on point.

The Taxpayer will receive an updated bill including accrued interest charges. This bill should be paid within 30 days from the date of the bill to avoid the accrual of additional interest charges. Please return your payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attn: *****.

Further, because the Taxpayer does not qualify for the industrial manufacturing exemption, the use tax was properly remitted on prior purchases of equipment used in the Taxpayer's colorant operation. As such, the Taxpayer is not entitled to a refund.

The Code of Virginia sections, regulations and public documents cited 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 about this determination, you may contact ***** at *****.
                • Sincerely,

                • Kenneth W. Thorson
                  Tax Commissioner


AR/50670


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46