93-165 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing, processing, assembling, or refining; Rope manufacturer

Topic

Taxability of Persons and Transactions

Date Issued

07-29-1993

July 29, 1993

Re: §58.1-182l Application: Retail Sales and Use Tax

Dear*****************

This is in response to your letter whereby you seek correction of a sales and use tax assessment issued to************* (the Taxpayer) for the period February 1989 through January 1992. I note that the total assessment has been paid in full.

FACTS

The Taxpayer operates as both a retailer of maritime supplies and as a fabricator of rope products, such as hoists, slings and towropes. This latter activity is generally done under contract with the V. 5. and foreign governments. Basically, in making the hoists and other products, the Taxpayer orders quantities of rope, cuts it to length and fits the rope with hooks, pulleys and other hardware. Also, many of the Taxpayer's contracts require that the rope be treated with a urethane coating. Finally, after the product is fabricated, it is generally tested to determine if its load capacity meets or exceeds the contractual specifications. The Taxpayer performs this testing by using a farm tractor in conjunction with a dynamometer, both of which were held taxable in the audit.

Regardless that much of the Taxpayer's activity is done by hand, the Taxpayer contends that this activity is industrial in nature. Therefore, the Taxpayer contends it qualifies for the industrial manufacturing exemption on items it purchases, including the tractor and dynamometer which are used for quality control.

Additionally, you contest the tax on a retail sale to ********* (the Customer) who provided the Taxpayer with an invalid exemption certificate at the close of the audit. Furthermore, the Taxpayer requests that certain other untaxed sales be removed from the assessment.

DETERMINATION

Each of the issues will be addressed separately below:

Industrial manufacturing: Va. Code §58.1-608(A)(3)(b) provides an exemption for "machinery or tools or repair parts therefor ... used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale." Further, Va. Code §58.1-602 indicates that:

- The determination whether any manufacturing [or] ... processing activity is industrial in nature shall be made without regard to plant size, existence or size of finished product inventory, degree of mechanization, ... 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.... (emphasis added)

A review of the SIC Manual (1987 Edition) would suggest that the Taxpayer's processing of rope into hoists, slings and towropes is industrial in nature. Code 2298, for example, lists the manufacture of cordage slings and nets, and I feel that the Taxpayer's activity is substantially similar to this classification. Furthermore, codes 3536 and 3537 list the manufacture of various types of hoists and slings used in material handling.

In applying the manufacturing and processing exemption to the tractor used to test the load capacity of the finished product, Virginia Regulation (VR) 630-10-63 provides that the exemption applies to all steps of an integrated manufacturing process including "production line testing and quality control."

Based on the above, the exemption applies to the Taxpayer's production activities including the purchase of the tractor used in the testing of the finished product. As a precaution, however, the exemption does not apply to the Taxpayer's retail activity, and any equipment, tools or repair parts used in both activities will or will not be taxable depending on predominance of use as outlined in VR 630-10-63(D).

Nontaxed sales: The primary contested transaction involves a November 1990 sale to the Customer allegedly for resale to an industrial client. The Taxpayer did not take a resale exemption certificate, Form ST-10, at the time of the transaction, but received one when the oversight was found during the audit. However, the exemption certificate, which was dated March 1992, was found to be invalid in that the Customer's Certificate of Registration number had been closed about eight months prior to the date of the transaction.

In making its protest the Taxpayer has provided a copy of the Customer's original purchase order (submitted with credit information) directing the Taxpayer to deliver a length of rope directly to the industrial client. It is noted that the same Certificate of Registration number is listed on these documents as appears on the exemption certificate. The Taxpayer has also provided a copy of its delivery ticket as well as a copy of the industrial client's direct pay permit.

Va. Code §58.1-623 mandates that

- "[A]ll sales ... are subject to the tax until the contrary is established. The burden of proving that a sale ... of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter"

There is some indication that the Customer may have been operating as a contractor for the industrial client, in which case the Customer would be the user and consumer of all tangible personal property used to fulfill its contractual obligations. Furthermore, I understand that sales made to contractors working for the same industrial client were at issue during a prior audit. Therefore, based upon the evidence before me, the Taxpayer has yet to provide proof of exemption as mandated in the Code.

In regard to other nontaxed sales, the Taxpayer has presented no evidence proving that such sales were exempt. I understand that the auditor gave the Taxpayer sufficient time at the close of the audit to obtain valid exemption certificates, and indeed removed from the assessment many transactions once the required documentation was presented. Nevertheless, I find no grounds to remove any of the remaining nontaxed sales.

Accordingly, the assessment will be revised based on the determination noted above, and a refund will be issued to the Taxpayer as soon as practicable.

Sincerely,

W. H. Forst
Tax Commissioner

OTP/6625I

Rulings of the Tax Commissioner