Document Number
05-116
Tax Type
Retail Sales and Use Tax
Description
Ophthalmic laboratory is separate from the retail optical departments
Topic
Manufacturing Exemption
Property Subject to Tax
Date Issued
07-19-2005


July 19, 2005




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

Dear *****:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period June 2000 through May 2003. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates five ophthalmic laboratories and a number of retail optical departments in host stores throughout the country. In Virginia, the Taxpayer operates one ophthalmic laboratory and 27 retail optical departments. You represent that the Virginia based ophthalmic laboratory manufactures and fabricates prescription eyewear for retail optical departments both within Virginia and outside Virginia. Orders for prescription eyewear are placed with the ophthalmic laboratory from the Taxpayer's retail optical departments located throughout the country. In accordance with strict specifications, the laboratory uses power driven machinery and equipment to grind, cut and edge lenses. In addition, the laboratory applies UV, anti-glare and scratch resistant coatings to the lenses. The lenses are then assembled into a complete pair of spectacles using ophthalmic frames.

You represent that the ophthalmic laboratory is separate and apart from the Taxpayer's retail optical departments and the laboratory does not conduct retail sales or similar activities. You assert that the activities conducted at the ophthalmic laboratory are exempt from the retail sales and use tax pursuant to Va. Code § 58.1-609.3 2(iii) because the manufacturing activities are performed at a separate establishment apart from the retail activities. The activities conducted at the laboratory are classified under the Standard Industrial Classification (SIC) manual as 3851, even though the legal entity is classified under SIC 5995.

DETERMINATION

Virginia Code § 58.1-609.3 2(iii) provides an exemption from the retail sales and use tax for machinery, tools and other items used directly in industrial manufacturing of tangible personal property for sale or resale. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B defines industrial processors as "establishments engaged in the treatment of materials, substances or other products in such a manner as to render such products more useful or marketable. Products need not undergo a change in state or form in order for an establishment to be classified as an industrial processor." This regulation states that only those items used directly in the manufacturing process are exempt. Machinery, tools or supplies must be an integral part of a process in which products are manufactured for sale or resale and the manufacturing process must be industrial in nature to qualify for exemption.

The Department previously ruled in Public Document (P.D.) 86-52 (3/17/86) that a retail business that conducts a processing operation separate from its retail operations may qualify for exemption as an industrial processing. In this case, the Taxpayer operates an ophthalmic laboratory that is separate from its retail optical departments.

In order to determine whether the Taxpayer is entitled to the manufacturing exemption, it must first be determined whether the activities conducted at the ophthalmic laboratory constitute 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 ophthalmic laboratory grinds, cuts and edges lenses and applies a variety of coatings and then assembles a complete pair of spectacles. Pursuant to Va. Code § 58.1-602, it is clear that the equipment in the ophthalmic laboratory is used in a manufacturing activity.

Next, it must be determined whether the Taxpayer's manufacturing activities are industrial 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 this case, the Taxpayer's activities conducted at the laboratory are classified under SIC code 3851, a manufacturing code. Further guidance is found in the North America Industry Classification System (NAICS), which replaced the SIC Manual in 1997. The Taxpayer's ophthalmic lens laboratory is classified under NAICS industry code 339115, a manufacturing code.

Based on the information presented, the Taxpayer's ophthalmic laboratory and assembly of eyeglasses at a location separate and apart from its retail departments is not incidental or secondary to its retail operations; thus, the manufacturing exemption would apply to purchases of items used directly by the Taxpayer in its laboratory. "Used directly" is defined in Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration." The audit will be adjusted to remove those purchases that qualify for the manufacturing exemption.

Amnesty Penalty

The assessment issued to the Taxpayer includes a 20% amnesty penalty. You request the authority "that supports the lawfulness of this penalty."

Virginia Code § 58.1-1840.1 established the Virginia Tax Amnesty Program. Virginia Code § 58.1-1840.1 F 1 provides:
    • If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains an outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the taxpayer.

In regard to your contention that the Taxpayer was not advised of the Amnesty Program, there were sufficient resources available for the Taxpayer to be properly apprised of its eligibility for amnesty for all periods under audit through April 2003. Concurrent with the release of the Department's web site (www.VaTaxAmnesty.com) on August 1, 2003, the Department issued a media release outlining the terms of Amnesty.

Because the Taxpayer's use tax compliance ratio did not meet the required 85% threshold for a third or subsequent audit, the auditor properly assessed the amnesty penalty; however, in light of my determination regarding the availability of the manufacturing exemption, the Taxpayer's compliance and amnesty penalties will be reviewed. If the Taxpayer's use tax compliance ratio meets or exceeds 85% after the audit adjustments are made, the compliance and Amnesty penalties will be abated.

The Code of Virginia sections, regulation and Public Documents cited, along with other reference documents, are available on-line in the Department's Tax Policy Library, located at www.policylibrary.tax.virginia.gov. 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/50693.i


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46