Tax Type
Retail Sales and Use Tax
Description
Manufacturing and sales of aluminum sheet metal; Exemption certificates
Topic
Exemptions
Property Subject to Tax
Date Issued
08-12-1991
August 12, 1991
Re: §58.1-1821 Application: Sales and Use Tax
Dear***************
This will reply to your letter of December 14, 1990 in which you seek correction of the sales and use tax assessments issued to your client, ************* (the "Taxpayer").
FACTS
The Taxpayer is in the business of manufacturing and selling aluminum sheet metal as well as aluminum fabricating machinery. The Taxpayer was audited for the period of July 1986 through August 1989 and was held liable for the sales tax on the sale of aluminum fabricating machinery for which no sales tax was collected and for which no exemption certificates were on file. The machines in question are portable gutter machines which enable the operator to take a piece of flat aluminum and run it through a series of rollers, formers, cutters and trimmers to produce a custom-made seamless gutter. The Taxpayer contends that the machines are used in manufacturing; therefore, exempt from the sales and use tax. The Taxpayer feels that their customers would fall under Industry Group 34, specifically Sheet Metal Work, in the Standard Industrial Classification Manual (SICM), thus classifying them as industrial manufacturers for sales and use tax purposes. The auditor has taken the position that the Taxpayer's customers are classified under Industry Group 15, General Contractors and operative Builders; thus, they are using and consuming contractors and liable for the sales and use tax on all of their purchases.
The Taxpayer also takes the position that under Virginia sales and use tax law, the sales and use tax liability falls on the final consumer. Therefore, holding the Taxpayer liable for the tax on these sales, penalizes the Taxpayer by requiring them to make an "out of pocket payment."
DETERMINATION
Virginia Regulation (VR) 630-10-63(B)(1) defines industrial manufacturer to "include but not be limited to businesses classified or substantially similar to other businesses classified in codes 20 through 39 of the Standard Industrial Classification Manual published by the U.S. Department of Commerce." Industry Group 34 of the SIC Manual sets forth those businesses that are primarily engaged in the production of fabricated metal products. While I am aware that gutters are listed under Industry Number 3444, Sheet Metal Work, it is clearly stated in the description that the classification does not include "fabrication work done by construction contractors at the place of construction."
According to the auditor, the only sales of gutter machines included in the audit were sales to general contractors. General contractors are clearly limited to those industries classified in Major Industry Group 15 of the SICM, which do not qualify for the industrial manufacturing exemption. It is also possible that the Taxpayer's customers may fall into Major Industry Group 17, which specifically includes special trade contractors, such as sheet metal contractors who install gutters.
Regardless of whether the customers were general contractors or special trade contractors, they are contractors with respect to real estate. Va. Code §58.1-610 and VR 630-10-27 addresses contractors with respect to real estate and clearly state that contractors are the users and consumers of all tangible personal property purchased by them; therefore, liable for the sales and use tax.
Whether or not the machinery sold by the Taxpayer was used as part of an exempt industrial manufacturing operation, the Taxpayer failed to take from the purchasers exemption certificates indicating that the sales qualified for exemption from the tax. VR 630-10-20 (copy enclosed) addresses exemption certificates and the proper use thereof. This regulation states, in part, the following:
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- All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. (Emphasis added).
If the Taxpayer can demonstrate that its customers meet the requirements of Industry Group 34, rather than Industry Groups 15 or 17, it will be necessary for the Taxpayer to obtain exemption certificates from those customers held taxable in the audit. I will allow the Taxpayer an additional 60 days to furnish to the department any properly executed exemption certificates to substantiate any exempt sales held taxable in the audit. Absent additional information, I must deem the audit liability due and payable.
I must further caution the Taxpayer that VR 630-10-20(B) requires the Taxpayer to exercise reasonable care and judgment to prevent the receiving of a false, fraudulent or bad faith exemption certificate. Exemption certificates not accepted in "good faith" by the Taxpayer, e.g., gutter contractors and taxpayers who do not list a sales tax certificate of registration number on the exemption certificate, will not be honored by the department.
In regard to the sales and use tax liability falling on the final consumer, the Taxpayer may bill their nonexempt customers for any sales tax due on nontaxed sales. Under Va. Code §58.1-625, it is stated that "such tax shall be a debt from the purchaser, consumer, or lessee to the dealer until paid and shall be recoverable at law in the same manner as any other debts."
If you should have any further questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner