Document Number
04-73
Tax Type
Retail Sales and Use Tax
Description
Taxpayer maintains that the uni-plant is exempt equipment
Topic
Manufacturing Exemption
Date Issued
08-24-2004

August 24, 2004


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

Dear ********:

This is in reply to your letter in which you request a refund on behalf of ***** (the "Taxpayer") of the use tax paid in March 1999 on a purchase of equipment. Your letter is being treated as an application for correction of an erroneous assessment pursuant to Va. Code § 58.1-1821. I apologize for the delay in the Department's response.
FACTS

The Taxpayer sells coffee, office products, cleaning supplies and other items at retail to business customers. As part of this retail operation, the Taxpayer also sells five-gallon bottled water to its customers. To support its bottled water sales, the Taxpayer purchased a uni-plant that it uses to purify and bottle the water. The uni-plant removes chlorine and other impurities from municipal water, adds oxygen, and bottles the water in the Taxpayer's five-gallon bottles.

The Taxpayer accrued and remitted use tax on the purchase of the uni-plant. It now seeks a refund of that tax and maintains that the uni-plant is exempt equipment under the manufacturing exemption set out in Va. Code § 58.1-609.3(2). During a recent audit, the audit staff denied the refund based on the Virginia Supreme Court's decision in Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 198 S.E.2d 219 (1973) and Public Documents 97-122 (3/10/97) and 94-337(11/10/94).
DETERMINATION

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 replacements 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 whether the Taxpayer is entitled to the manufacturing exemption, and thus a refund of the use tax remitted on the purchase of the uni-plant, it must first be determined whether the use of the uni-plant by the Taxpayer constitutes a manufacturing activity. Virginia Code § 58.1-602 provides that manufacturing:
    • 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.
    • The determination whether any manufacturing, mining, processing, refining or conversion activity is industrial in nature shall be made without regard to plant size, existence or size of finished product inventory, degree of mechanization, amount of capital investment, number of employees or other factors relating principally to the size of the business. Further, "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.

The uni-plant removes chlorine and other impurities from municipal water, adds oxygen, and bottles the water in the Taxpayer's five-gallon bottles. Pursuant to Va. Code § 58.1-602, it is clear that the uni-plant is used by the Taxpayer in a manufacturing 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. In Public Document 94-359 (11/28/94), the Department stated that:
    • 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 Public Document 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 Public Document 99-43 (3/31/99), the taxpayer was in the business of selling building materials both on the retail and wholesale level. The taxpayer also operated a door fabrication facility and mill shop. The taxpayer sought the manufacturing exemption for its manufacturing activities that related to the door fabrication and mill shop operation. It was clear that the taxpayer's mill shop operation was a manufacturing activity. The Department concluded that the mill operation was not the primary purpose of the taxpayer's retail business. Accordingly, the Department found that the mill shop operation was incidental to the taxpayer's retail establishment and that it was not entitled to the manufacturing exemption.

In this instance, the Taxpayer has a retail business in which it sells coffee, bottled water, office supplies and janitorial supplies. The primary purpose or the predominant nature of its retail business is to sell these items to consumers. While the processing and bottling of the water is necessary for the sale of bottled water, these activities are incidental to the Taxpayer's retail business.

Industrial v. Nonindustrial in Nature

Finally, it must be determined whether the Taxpayer's manufacturing activities are industrial in nature. Title 23 of the Virginia Administrative Code (VAC) 10-210­920(B)(1) provides that:
    • 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.

In Golden Skillet, the Virginia Supreme Court held that in the case where equipment is used in the preparation and cooking of chicken for sale at retail, the activities are deemed to be nonindustrial in nature, and the taxpayer is not entitled to the industrial manufacturing exemption.


In Public Document 94-337 (11/10/94), the taxpayer operated a retail meat store, and on the same premises the taxpayer slaughtered animals and processed meat. The taxpayer sought an industrial exemption for the equipment and supplies used in the processing operation. Pursuant to 23 VAC 10-210-920, the Department found that the meat processing was incidental to the taxpayer's retail business. The Department also found that the processed meat was primarily for direct sales to the taxpayer's customers. Accordingly, the activity was deemed to be nonindustrial in nature, and the equipment purchased for use in the processing portion of the taxpayer's business did not qualify for the manufacturing exemption.

The Taxpayer's situation in this instance is analogous to that of the taxpayer in the Golden Skillet opinion and to that of the taxpayer in Public Document 94-337. In accordance with the provisions of 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 uni-plant, are an incidental part of its retail business and are deemed nonindustrial activities. Accordingly, the Taxpayer does not qualify for the industrial manufacturing exemption provided for in Va. Code § 58.1-609.3(2).
CONCLUSION

Based on this determination, the use tax was properly remitted by the Taxpayer. As such, the Taxpayer is not entitled to a refund for the amount paid.

The Code of Virginia, regulations and public documents cited are available on-line in the Tax Policy 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 ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,


                  • Kenneth W. Thorson
                    Tax Commissioner



AR/32807P


Rulings of the Tax Commissioner

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