06-90 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Applying the industrial manufacturing exemption to separate entities

Topic

Corporate Distributions and Adjustments

Manufacturing Exemption

Taxable Transactions

Date Issued

09-19-2006

September 19, 2006

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

Dear *****:

This is in response to your letter and phone conversation with a member of the Appeals and Rulings staff in which you seek correction of the retail sales and use tax assessment issued to ***** ("the Taxpayer"), for the period March 2002 through February 2005. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a business consisting of three divisions that are located at the same physical address. The divisions use a shared accounting system and operate under the same federal identification number. One division is in the business of conveyor sales and services. The Taxpayer's second division operates a machine fabrication shop. The third division sells industrial supplies.

The Taxpayer asserts that each division's activities should be evaluated separately for purposes of applying the industrial manufacturing exemption. The Taxpayer claims that its machine fabrication shop manufactures spools and that this activity constitutes the majority of this division's operations. For this reason, the Taxpayer suggests that this division's activities constitute industrial manufacturing. In addition, the Taxpayer's conveyor sales and services division splices belts using a vulcanization process that it maintains qualifies as industrial processing.

As a result of the Department's audit, the auditor concluded that the Taxpayer's primary business activity, based on gross sales, is conveyor sales and service. As such, the auditor denied the industrial manufacturing exemption in Va. Code § 58.1-609.3 2 and assessed tax on machinery and equipment used in the Taxpayer's vulcanization process and in its machine fabrication shop.

DETERMINATION

Virginia Code § 58.1-609.3 2 provides an exemption from the sales and use tax for machinery, tools, and other items used directly in the manufacture of tangible personal property for sale or resale in the industrial sense. Virginia Code § 58.1-602 provides that the term "industrial in nature" includes all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual." Title 23 of the Virginia Administrative Code 10-210-920 B further provides that an industrial manufacturer shall "include but not be limited to businesses classified or substantially similar to other businesses classified in codes 20 through 39" of the SIC Manual.

In establishing whether a taxpayer is an industrial manufacturer or a retailer pursuant to the SIC Manual, the Department considers the predominant nature of a business. This policy is addressed in Public Document (P.D.) 02-32 (3/15/02).

In this case, approximately 68 percent of the Taxpayer's total sales are attributable to conveyor sales and services. Therefore, the predominant or primary activity of the Taxpayer's business is sales and services, which makes it similar to businesses that fall under the SIC classification 5085. Businesses under this classification encompass "[e]stablishments primarily engaged in the wholesale distribution of industrial supplies, including hoses, belting and rubber goods to industrial users." Based on this and the cited authorities, the Taxpayer does not qualify as an industrial manufacturer.

In addition, the Taxpayer's vulcanization activities do not qualify as industrial in nature in accordance with the determination in P.D. 01-179 (10/31/01). In that determination, the Department ruled that conveyor belt splicing by vulcanization did not qualify for the industrial manufacturing exemption because the taxpayer did not create the belt from raw materials in an industrial sense. The taxpayer in that determination also fell under the SIC classification 5085. P.D. 01-179 is on point with the Taxpayer's case. The Taxpayer's vulcanization process used for belt splicing does not qualify as "industrial in nature".

Because the Taxpayer's primary activities do not qualify it as a manufacturer, the Taxpayer's machine fabrication shop and conveyor sales and services (vulcanization) activities are not considered manufacturing in the industrial sense. Machinery and equipment used in these activities are taxable, and the tax was properly applied in the audit.

Based on the foregoing, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding balance of the bill is paid within 30 days from the bill date. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****.

The Code of Virginia sections and Public Documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/56192T

Rulings of the Tax Commissioner