93-3 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing, processing, assembling, or refining; Supplies used in glassware rental business

Topic

Taxability of Persons and Transactions

Date Issued

01-06-1993

January 8, 1993

Re: §58.1-1821 Application: Retail Sales and Use Tax

Dear*****:

This will reply to your letter whereby you seek correction of a sales and use tax assessment for * * ***( the Taxpayer) for the period of June 1987 through May 1990. I note that the full audit assessment has been paid.

FACTS

The Taxpayer is engaged in the rental of a wide variety of products including linens, glassware, china, tools, medical supplies, etc. The Taxpayer contests the tax on the purchase of certain tangible personal property used in the rental of its linen products. The Taxpayer also contests the tax on the purchase of equipment and supplies, including plastic racks, cleaning agents, and plastic film used in the rental of dishes and glassware.

DETERMINATION

I will separately address below the issues raised by the Taxpayer:

Laundry equipment and supplies: These items have been removed from the audit under authority of Va. Code §58.1-608(A)(3)(h). This statute provides an exemption from the tax for

- Tangible personal property including machinery, tools, repair parts . . . and supplies and materials used directly in maintaining and preparing textile products for rental or leasing by an industrial processor engaged in the commercial leasing or renting of laundered textile products.'

Dishes and glassware equipment and supplies: I understand that the racks resemble plastic crates and are used to protect the dishes and glassware from breakage. The rented glassware is delivered to and returned by the customer in these racks. Upon return, the glassware is both washed and stored while still in the racks in preparation for subsequent re-rental. The racks and glassware are covered with plastic wrap to keep them clean while in storage.

Va. Code §58.1-604 imposes the tax "upon the use or consumption of tangible personal property in this Commonwealth . . ..' As noted in Virginia Regulation (VR) 630-10-63, however, an exemption from the tax is available for certain tangible personal property used or consumed by industrial manufacturers and industrial processors. Such exempt property includes containers "for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable).'

In order to enjoy the exemptions set forth in VR 630-10-63, an establishment must be deemed an "industrial manufacturer,' and to this end the regulation mandates that:

- The term "industrial manufacturer' as used herein shall 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.

A review of the 1987 edition of the SIC Manual shows that the Taxpayer's activities do not fall within codes 20 through 39, but rather are classified in code 7359 which is designated as "business services.' Further, subsection B 1 of VR 630-10-63 specifically provides that "[e]stablishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in nonindustrial activities.' The Taxpayer's cleaning and packaging of dishes and glassware is clearly an incidental part of its business of leasing tangible personal property.

Therefore, while the Taxpayer's linen rental operation enjoys the specific statutory exemption noted above, the exemptions available to industrial manufacturers do not extend to the Taxpayer's other activities which are nonindustrial in nature.

Furthermore, as indicated in VR 630-10-26, the tax does not apply to containers, boxes, sacks, cans, bags and similar items if such packaging materials "are marketed with the product being sold and become the property of the purchaser.' (emphasis added).

In the instant case the racks do not become the property of the purchaser, but are used by the Taxpayer to prevent breakage of its products, to facilitate the washing of those products and to store the products for subsequent re-rental.

Similarly, chemicals and other cleaning agents used to wash the glassware are items which are used and consumed by the Taxpayer in the rendition of its rental operations. However, the plastic wrap which is used to package the glassware and returnable racks, and which becomes the property of the customer, is deemed to be exempt packaging materials.

Accordingly, the audit will be revised to remove the purchase of plastic wrap from taxable purchases, but is correct in all other respects. A refund reflecting this revision will be sent to the Taxpayer as soon as practicable.

Sincerely,

W.H. Forst
Tax Commissioner

Rulings of the Tax Commissioner