Tax Type
Intangible Personal Property Tax
Description
Inventory
Topic
Taxpayers' Remedies
Date Issued
11-19-1986
November 19, 1986
Re: §58.1-1821 Application: Intangible Personal Property Tax
Dear ********************
This will reply to your letter of July 15, 1986 in which you seek relief of intangible personal property tax assessments against Taxpayers for 1980 through 1984.
Facts
Taxpayers underwent a field audit for the years 1980 through 1984 in which tax, penalty and interest were imposed. Taxpayers protest the application of intangible personal property tax to their inventory on the grounds that **************** is a merchant and not a manufacturer, and thus not subject to the tax; that ****** had no inventory at the beginning of the years in question; that***** was not engaged in manufacturing; that, even if some of ******inventory is deemed to be that of a manufacturer and not of a merchant, the tax should apply only to that portion which is manufacturer's inventory; and that the Department erred in assessing penalty and interest.
Taxpayers filed *****1986 for bankruptcy protection in the United States Bankruptcy Court for the Division of ******************.
Determination
Taxpayers claim that *******is in the business of buying and selling wire products and that **** processes wire products by, among other things, twisting strands of wire together and having insulation or sheathing applied to them. The department's auditors, however, determined that **** owned the inventory, raw materials and manufacturing machinery and equipment, and purchased from **** the labor necessary to operate the plant and warehouse and manufacture the wire cable from raw materials. The auditors also determined that ********purchased wire cables for resale as is and for further use in manufacturing larger cables made up from imported strands to be sheathed and insulated. Moreover, in a 1983 Virginia Intangible Personal Property Tax Return furnished by Taxpayers, ************** lists "manufacturing cable' as its "kind of business."
Manufacturing involves the change or transformation of the original raw material "into an article or product of substantially different character. . . " Prentice v. City of Richmond, 197 Va. 724, 731 (1956). Processing requires merely that the product undergo a treatment rendering it more marketable or useful. Commonwealth v. Orange-Madison Cooperative Farm Serv., 220 Va 655, 657-58 (1980). From the facts presented by ******* I must conclude that it is engaged in manufacturing when it, through its hired labor force, creates wire cable from strands of wire and sheathing.
There is no need to address whether ******is engaged in manufacturing because the assessment does not include any inventory of *****************.
With respect to ******* claim that some of its inventory is that of a merchant and not that of a manufacturer, the department would be willing to eliminate from the audit those items which ********* can substantiate were inventory of a merchant. The department would also be willing to eliminate from the audit those imported goods which ********* can substantiate were in its inventory and had not lost their status as imports. This happens when the package in which they were shipped is opened; for goods which are not packaged, when such property has reached its second place of rest or storage after being unloaded; after initial sale; or after such goods have been committed by the importer to current operational needs.
The department did not err in assessing penalty and interest. Taxpayers did not discharge their duty of filing a return and paying tax due. Moreover, the proper interest rate was applied. Va. Code §58.1-15, effective January 1, 1985, is a successor to Va. Code §58-1160.1, the applicable provision during the audit.
An assessment adjusted in accordance with this letter will be issued after Taxpayers provide the requested information.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner