December 14, 2021
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on behalf of ***** (the “Taxpayer”) concerning the retail sales and use tax exemption for industrial manufacturers or processors. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, a cold storage provider with a facility in Virginia, receives fresh meat products from customers, reduces the temperature of the product to freezing or near-freezing temperatures and maintains those temperatures until the product is shipped from the facility. The Taxpayer explains that approximately 90% of the products that are anticipated to be received at the facility will arrive at approximately 45 degrees fahrenheit and then will be either hard frozen at the facility or reduced in temperature to just above freezing.
The Taxpayer describes the machinery and equipment at issue as an industrial ammonia refrigeration system comprised of various refrigeration components including compressors, evaporators, vessels, pumps, heat exchanges, condensers and associated piping, controls and valves. This equipment will be purchased to refrigerate a facility expansion space which includes an industrial freezer zone and a cooled loading dock. In addition, certain improvements and modifications will be made to the refrigeration system in the existing facility so it can support the expansion. None of the equipment at issue, however, will be used to provide temperature control to anywhere other than the industrial freezer and cooling zones and cooled loading dock. Other areas of the facility such as offices, restrooms, break rooms and other common areas are controlled by an ancillary heating and cooling system.
The equipment at issue also includes a racking system. The racking equipment creates space around the sides of every pallet and protects stacked products from destruction. Industry standards require a certain spacing minimum between product containers so as to ensure proper cooling, including proper removal of heat created by microbial processes that naturally occur within the product. The Taxpayer requests a ruling regarding whether its purchases of the equipment described above will qualify for the manufacturing and processing exemption pursuant to Virginia Code § 58.1-609.3 2 iii.
RULING
Industrial Manufacturing and Processing Exemption
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 . . . used directly, in processing, manufacturing, refining, mining or converting products for sale or resale . . . .” A number of Virginia court cases have interpreted this statute. There are two of noted significance in this instance. The Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973) held that the exemption was available only for processors of products for sale or resale in the industrial sense. Additionally, the Virginia Supreme Court in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980) opined that not all processing qualifies for the industrial manufacturing exemption because the exemption is limited to processing operations that are industrial in nature.
The opinions rendered in the cited court cases are reflected in the Department’s manufacturing and processing regulation. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 A states that for a business to obtain the exemption, it must be manufacturing or processing products for sale or resale. In accordance with the cited case law, such production must be industrial in nature. The Department’s reliance on business classifications for purposes of determining whether manufacturing and processing activities are considered industrial in nature is based on the statutory definition of manufacturing and processing in Virginia Code § 58.1-602. Included in this definition is an explanation of the term “industrial in nature.” As this term is defined, businesses are considered industrial in nature if classified in codes 10 through 14 and 20 through 39 in the SIC Manual for 1972 and in supplements issued thereafter. The SIC has since been replaced by the North American Industry Classification System (NAICS). Both the SIC and NAICS assign industrial classifications according to the primary activity of the business. Unless the primary business activity is manufacturing or processing in accordance with these classifications, the Department would not consider the business to be eligible for the manufacturing and processing exemption.
Although it appears to be an issue of first impression in Virginia, the freezing or chilling of food has been considered industrial processing in cases from other states. See, e.g., Fischer Artificial Ice & Cold Storage Company vs. Iowa State Tax Commissioner, 81 N.W.2d 437 (Iowa 1957) and Hudson Foods vs. Director of Revenue, 924 S.W.2d 277 (Mo. 1996). In addition, NAICS industry group 3114 include establishments that freeze food and those that use preservation processes, such as pickling, canning or dehydrating, both of which begin their production process with inputs of vegetable or animal origin. The categorization of such businesses as manufacturing by the NAICS is consistent with the case law.
It has been held, however, that merely maintaining an already frozen product in its frozen state does not constitute processing. See Wetterau, Inc. v. Director of Revenue, 843 S.W.2d 365 (Mo. 1992). This is also consistent with the NAICS classification 493120, Refrigerated Warehouse and Storage. This industry comprises establishments primarily engaged in operating refrigerated warehousing and storage facilities. The services provided by these establishments include blast freezing, tempering, and modified atmosphere storage services. This is not a manufacturing or processing business classification.
In the Department’s opinion, the information provided supports the Taxpayer’s classification under NAICS classification 493120, Refrigerated Warehouse and Storage. Although the Taxpayer conducts freezing activities, including blast freezing activities, at its facility, it appears that the Taxpayer’s predominant activity is cold storage. Products that arrive at the facility must be hard frozen within 72 hours of arrival and then spend on average 39 days at the facility. This difference in time suggests that the predominant activity is cold storage. This inference is also supported by the sample revenue breakdowns provided by customer. In each case, storage and handling fees were higher than the freezing fees. Because the Taxpayer’s predominant business activity is not categorized under a manufacturing or processing business classification, the Taxpayer would not be able to claim the manufacturing and processing exemption for the equipment at issue.
Sale or Resale
Sales and use tax exemptions are strictly construed pursuant to the decision in Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973). Virginia Code § 58.1-609.3.2 iii requires that the processing of products be for sale or resale. The regulation reflects the statute, explaining that “for a business to obtain the exemption, it first must be manufacturing or processing products for sale or resale.” See Title 23 VAC 10-210-920 A.
In this case, it appears that the Taxpayer charges for the chilling, freezing and storage of food products as services to its customers. As such, the Taxpayer is not itself processing products for sale or resale. Rather, it is performing services for its customers. As a service provider, the Taxpayer would be considered the user and consumer of tangible personal property provided in the provision of its services, and thus subject to the use tax on such property. See Title 23 VAC 10-210-4040 E.
CONCLUSION
In the Department’s opinion, the equipment at issue would not qualify for the manufacturing and processing exemption because the Taxpayer is primarily operating as a refrigerated warehouse and storage business, which is not by NAICS classification considered manufacturing or processing. In addition, the Taxpayer does not actually process any products for sale or resale. Rather, it charges customers for the services it performs for them.
This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections and regulations cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1925.M