Tax Type
Retail Sales and Use Tax
Description
Items not used directly in the manufacturing process do not qualify for exemption
Topic
Assessment
Definitions
Exemptions
Date Issued
06-10-2005
June 10, 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 1998 through December 2002.
FACTS
The Taxpayer operates a facility in Virginia. The Taxpayer imports finished apparel from manufacturers located outside the United States. The finished apparel is transported from the port of entry to the Virginia facility via truck. The finished goods are removed from the shipping containers and placed in finished goods inventory for removal as orders from retail outlet customers are filled by the Taxpayer.
As a result of the Department's audit, tax was assessed on equipment and other items purchased by the Taxpayer for use at the Virginia facility. The Taxpayer contends that it is recognized as a manufacturer for local tax purposes and is involved in the manufacture of apparel; therefore, it qualifies as a manufacturer regarding the application of the retail sales and use tax and is not subject to tax on the assessed items.
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 replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing . . . or converting products for sale or resale." [Emphasis added.] Virginia Code § 58.1-602 defines "manufacturing" to include "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 . . . ."
In addition, Va. Code § 58.1-602 defines "distribution" to mean "the transfer or delivery of tangible personal property for use, consumption, or storage by the distributee, and the use, consumption, or storage of tangible personal property by a person who has processed, manufactured, refined, or converted such property . . . ." Title 23 of the Virginia Administrative Code 10-210-920 C 3 interprets this definition, stating the following:
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- "Distribution" is the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. [Emphasis added.]
Based on a review of the audit report and information provided with the Taxpayer's appeal, I cannot agree that the Taxpayer's facility qualifies for the manufacturing exemption under Va. Code § 58.1-609.3 2(iii). The facts presented indicate the products are completed for sale when received for storage at the Taxpayer's Virginia facility. No additional manufacturing or processing takes place. The activities conducted at the Taxpayer's Virginia facility fall within the definition of distribution and are not a part of manufacturing. Therefore, the exemption under Va. Code § 58.1-609.3 2(iii) is not applicable, as the assessed items are not used directly in the manufacturing process.
In regard to your argument that the Taxpayer is classified as a manufacturer for local tax purposes, the documentation from the County Economic Development Office states that the County would not assess inventory or equipment used in the Virginia facility. In addition, a document from the County Commissioner of the Revenue's office indicates that "the local taxation in [the County] on a distribution center owned by a manufacturer is as follows: There is no taxation on equipment or merchandise to the owner when classified as a manufacturer." [Emphasis added.] This classification as a manufacturer is for local tangible personal property taxation purposes only and does not constitute a manufacturing classification for Virginia retail sales and use tax purposes. This determination for state tax purposes does not review or pass on the prior determination for local tax purposes.
Based on the above determination, the assessment is correct. A bill, with interest accrued to date, will be sent to the Taxpayer under separate cover. No further interest will accrue provided the bill is paid within 30 days of the date on the bill. Please remit payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and the regulation cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's website, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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AR/53126i
Rulings of the Tax Commissioner