Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Reconditioning of Railroad Bearings
Topic
Taxability of Persons and Transactions
Date Issued
04-14-1992
April 14, 1992
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will reply to your letter of May 24, 1991 in which you seek correction of sales and use tax assessed to your client, **************(the Taxpayer), for the period August, 1987 through July 1990.
FACTS
The Taxpayer, as a manufacturer of tapered roller bearings and forgings for use in various industrial markets, also engages in a separate remanufacturing process involving the reconditioning of used railroad bearings for resale. This process takes place at the same plant site as the manufacturing operation. An audit of the Taxpayer produced an assessment for tangible personal property used in connection with the remanufacturing operation on the basis that it serves as a repair business. The Taxpayer contends that the remanufacturing process is industrial in nature and thus, qualifies for the industrial exemption under Va. Code §58.1-608(A)(3)(b).
DETERMINATION
The Taxpayer asserts that its remanufacturing process either constitutes "manufacturing" within the Virginia sales and use tax laws or the process should be considered industrial processing as distinguished in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980), which entitles the Taxpayer to exemption from the sales and use tax on purchases of tangible personal property used in connection with that process.
Va. Code §58.1-608(A)(3)(b) provides an exemption from the sales and use tax for machinery tools, and other items used directly in the manufacture of tangible personal property for resale in the industrial sense. Virginia Regulation (VR) 630-10-63(B), copy enclosed, defines industrial processors as "... establishments engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable. Products need not undergo a change in state or form in order for an establishment to be classified as an industrial processor" This section goes on to say that only those items used directly in the manufacturing process would be exempt. Therefore, in order for machinery or tools to gain exemption under the statute, the machinery or tools must be an integral part of a process in which products are manufactured for sale or resale and the manufacturing process must be industrial in nature.
The above interpretation was substantiated by the Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), which held that the cited statute and regulation were intended "to provide exemption for machinery and tools used in ... manufacturing ... products for sale or resale only in the industrial sense." And, Va. Code §58.1-602 provides, in pertinent part, that the term "industrial in nature." shall include all business classified in "code 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual".
A review of the remanufacturing process as outlined in your letter and the SIC Manual reveals that businesses, such as the Taxpayer, classified under SIC Code 3562 are deemed to be manufacturers in the industrial sense. Furthermore, rebuilding of machinery and equipment on a factory basis and machine shop repair are designated as elements of a manufacturing operation as opposed to activities of a repair business. (See SIC Manual, page 68.) Therefore, equipment and other items used directly in the remanufacturing operation qualify for the industrial manufacturing exemption.
Regarding the issue concerning the assessment of penalty, (VR) 630-10-80(C)(1), copy enclosed, provides for the mandatory application of penalty to second and subsequent audits. Assessment of penalty on audits is determined by the level of compliance exhibited by taxpayers. Compliance on third generation audits, as in the instant case, must be 75% or greater on both sales and purchases. Currently, compliance in this audit was 94% on sales and 11% on purchases, therefore penalty was properly assessed on the use tax portion of the audit.
The department's auditor will make the necessary adjustments to correct the assessment in view of the determination made in this case. If the revision of the audit increases the purchases compliance ratio to the acceptable level, then due consideration will be afforded the Taxpayer in abating the penalty.
Upon revision of the audit, you will receive a revised Notice of Assessment which will be due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner