Tax Type
Retail Sales and Use Tax
Description
Tax on untaxed fabrication charges and fabricated articles of tangible personal property
Topic
Manufacturing Exemption
Tangible Personal Property
Date Issued
06-18-2008
June 18, 2008
Re: § 58.1-1821 Application: Retail and Use Tax
Dear *****:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** for the period January 2004 through December 2006.
FACTS
The Taxpayer is a machine shop that primarily fabricates ornamental articles of tangible personal property on a job shop basis. An audit resulted in the assessment of sales tax on untaxed fabrication charges and fabricated articles of tangible personal property. In addition, use tax was assessed on untaxed purchases of tangible personal property used or consumed in the Taxpayer's business.
The Taxpayer contends that one sale included in the audit was never paid nor charged to the customer. The Taxpayer also contends that (1) certain sales for government projects are exempt transactions; (2) certain purchases qualify for the industrial manufacturing exemption set out in Va. Code § 58.1-609.3 2; and (3) a software upgrade was downloaded from the Internet and should be exempt from the tax.
DETERMINATION
Sales
The Taxpayer contends that the charge for line item #5 of the non-contested sales exceptions list was never paid or charged to the customer. It is my understanding that no information other than the Taxpayer's claim was provided to the Department's auditor. Virginia Code § 58.1-205 1 provides that "[a]ny assessment of a tax by the Department shall be deemed prima facie correct." This means that the burden of proving that the assessment is erroneous is upon the Taxpayer. The Taxpayer has not met its burden of proving that the tax does not apply. Pursuant to Va. Code § 58.1-205 1, line item #5 will remain in the audit.
The Taxpayer claims that line item numbers 11, 13 and 14 of the non-contested miscellaneous sales exceptions list were jobs prepared for the jet way wing of an airport and are exempt based on the government exemption. The Taxpayer also claims that line item #12 is a renovation job for a local government. It is my understanding, however, that these sales were made to a real estate contractor. Pursuant to Va. Code § 58.1-610, all such contractors are treated as consumers of all tangible personal property purchased for incorporation into realty. In this regard, Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A provides that no sale to a contractor is exempt on the ground that the other party to the contract is a government agency. Accordingly, line item numbers 11, 12, 13 and 14 will remain in the audit.
Manufacturing Exemption
Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for industrial materials that become a component part of or impregnated into the finished product, as well as, machinery, tools and repair parts thereof, fuel, power, energy, and supplies used directly in manufacturing products for sale or resale.
The Taxpayer claims that line item #1 (router) of the non-contested assets exceptions list and line item numbers 1, 2, 5-8, 10-19, and 21-27 (manufacturing supplies) of the non-contested purchases exception list are items used directly in the manufacturing process and are exempt pursuant to the exemption set out by Va. Code § 58.1-609.3 2.
Pursuant to the manufacturing definition in Va. Code § 58.1-602, the determination of whether a manufacturing activity is industrial in nature includes, but is not limited to, "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification (SIC) Manual for 1972 and any supplements issued thereafter." The determination of whether a manufacturing activity is industrial in nature is made without regard to factors relating principally to the size of the business.
The 1987 SIC Manual lists machine shops under the industrial manufacturing code 3599. This code is applicable to establishments "primarily engaged in manufacturing machinery and equipment and parts, not elsewhere classified" and "includes establishments primarily engaged in producing or repairing machinery and equipment parts, not elsewhere classified, on a job or order basis for others."
The SIC system has been superseded by the North American Industry Classification System (NAICS). The NAICS Manual for 2002 lists machine shops in the industrial manufacturing code of 332710. This code is applicable to "establishments known as machine shops primarily engaged in machining metal parts on a job or order basis." This code goes on to state, "Generally machine shop jobs are low volume using machine tools, such as lathes (including computer numerically controlled); automatic screw machines; and machines for boring, grinding and milling."
Based on the foregoing, I find basis for treating the Taxpayer as an industrial manufacturer for the audit period. Accordingly, the contested items (the router and manufacturing supplies) will be removed from the audit.
Software Upgrade
The Taxpayer contends that line item numbers 3 and 9 of the non-contested purchases exception list are exempt software upgrades because they were electronically delivered to the Taxpayer and qualify for the exemption in Va. Code § 58.1-609.5 1. As stated in P.D. 05-44 (4/4/05), the Taxpayer must provide specific documentary evidence proving that the software was electronically delivered. The Taxpayer provides no evidence in support of its contention. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has riot met its burden of proving that the tax does not apply. Accordingly, I find no basis for removing these items from the audit.
CONCLUSION
The assessment will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its 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 assessment will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its 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, regulations and public documents cited 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 ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-2052766232.R
Rulings of the Tax Commissioner