Tax Type
Retail Sales and Use Tax
Description
Photographic studio
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
08-24-1984
August 24, 1984
Re: Request for Ruling/Sales and Use Tax
Dear **************
This will reply to your letter of July 26, 1984 in which you submit an application for relief of sales and use tax assessed to as the result of an audit.
FACTS
***** (hereinafter *****) is engaged in the operation of a photographic studio. An audit of ***** revealed the failure to remit the sales and use tax on purchases of various items used in the business, including cameras, lights and other photographic equipment, photo lab equipment, parts, chemicals, and supplies, film, and waste treatment equipment.
***** requests relief of such assessment, contending that it is engaged in industrial processing and thus exempt from the sales and use tax on its purchases of the above items under the provisions of Virginia Code § 58-441.6.
RULING
§ 58-441.6 of the Code of Virginia provides an exemption from the sales and use tax for "industrial materials for future processing...into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product...industrial materials that are coated upon or impregnated into the product at any stage of its processing...(and) machinery...(and) supplies...used directly in processing...products for sale or resale."
The above statute was interpreted by the Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth, 214 Va. 2/6, 199 S.E.2d 511 (1973), in which the court held that the exemption was available only for processors of products for sale or resale "in the industrial sense." Thus, the exemption requires a two-pronged test; first, one must be processing products for sale or resale and second, such processing must be industrial in nature.
It is undisputed that ***** is engaged in the processing of products for sale or resale; consequently, we must determine whether such processing is industrial in nature.
The purchase of photographs from a photo studio like ***** is retail in nature. Although retailers are not precluded per se from the industrial exemption, we find the court's opinion in Golden Skillet to be helpful. There, the court held that "the process of preparing and frying chicken at retail...is not an industrial operation," 214 Va. at 279. Expounding further, the court in Commonwealth v. Orange-Madison Cooperative Farm Service, 220 Va. 655, 261 S.E.2d 532 (1980) restated that "[n]ot all processing...qualifies for the exemption," 220 Va. at 658, and that the exemption was intended to apply "only to true...industries, and not retailers such as restaurants," holding that "processing done by a restaurant is ancillary to the Service provided by the restaurant," 220 Va. at 659.
Here, I find the processing of photographs from film to be analogous to the factual situation set forth in Golden Skillet. Specifically, like a fast-food retailer, the processing carried on by ***** is purely ancillary to the service provided. Such an analogy is completely consistent with the court's findings in Orange-Madison, in which the court focused upon the nature of the processing rather than the retail sales of the processor, 220 Va. at 659. Clearly the processing performed by a photography studio is not dissimilar from that performed by a restaurant.
In addition, the Virginia General Assembly made manifest its intention with respect to the industrial exemption in 1983 when it added the following amendment to Virginia Code § 58-441.3(p):
The determination whether any...processing...activity is industrial in nature shall be made without regard to plant size, existence or size of finished product inventory, degree of mechanization, amount of capital investment, number of employees or other factors relating principally to the size of the business. Further, "industrial in nature" shall include, but not be limited to, those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual for 19/2 and any supplements issued thereafter.
A review of the Standard Industrial Classification Manual reveals that a business of the type conducted by***** is not included in codes 10 through 14 or 20 through 39 of that volume. Rather, commercial photography and photofinishing laboratories are classified in code 73 relating to business services and portrait photography is classified in code 72 relating to personal services.
Lastly, a rule of strict interpretation has been adopted by the Virginia Supreme Court with respect to statutory tax exemptions. Under this doctrine, any doubt as to exemption is resolved against the taxpayer, Commonwealth v. Research Analysis Corporation, 214 Va. 161, 198 S.E.2d 622 (1973).
Based upon the foregoing, I must conclude that ***** is not entitled to the industrial exemption. Its operations are not classified in codes 10 through 14 or 20 through 39 of the Standard Industrial Classification Manual, nor are they so different from those of retail fast food processors as to gain exemption based upon the court's ruling in Orange -Madison. Therefore, the assessment issued to ***** as the result of the department's recent audit remains due and payable.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner