Tax Type
Retail Sales and Use Tax
Description
Determining whether an operation is industrial
Topic
Appropriateness of Audit Methodology
Date Issued
04-02-1982
April 22, 1982
Re: §58-1118 Application/Use Tax
Dear *****************
This will reply to your letter of February 25, 1982 in which you apply for correction of use tax assessed as the result of a recent audit of ***********.
FACTS
***********(hereinafter" ) is engaged in the fabrication of repair parts for marine vessels and industrial equipment. The majority of items are fabricated by specific order, although a small number of fabricated items are retained as inventory. ************** is a large machine shop without a mechanized assembly line.
DETERMINATION
§58-441.6 of the Code of Virginia provides a sales and use exemption for:
-
- machinery or tools or repair parts therefore or replacement thereof, fuel, power, energy, or supplies used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale
- machinery or tools or repair parts therefore or replacement thereof, fuel, power, energy, or supplies used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale
In determining whether an operation is industrial, the Department has looked to several criteria, specifically the existence of a mechanized assembly line, plant size, inventory size, capital investment, and number of employees. We have generally held that machine shops do not qualify for the industrial manufacturing/processing exemption. This position is based upon the fact that such shops normally do not maintain a large inventory of finished products and do not utilize the mechanized assembly line which is generally characteristic of an industrial operation. While machine shops may have large facilities and considerable investment in machinery and tools, these two factors alone are not sufficient to qualify an operation as industrial.
********** is basically a machine shop without substantial inventory of finished products or a mechanized assembly line. Thus this operation is not entitled to the exemption for industrial manufacturers and processors under Virginia Code §58-441.6. However, as a fabricator of parts and repair parts you are entitled to a resale exemption on raw materials used to make the parts, the entire charge for which including labor, is subject to the tax.
Based upon the foregoing, I find no basis for granting relief from the use tax assessed. If you desire a hearing on this application, please advise us within thirty days, otherwise this determination letter will be considered final.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner