94-337 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Manufacturing, processing, assembling, or refining; Equipment used to slaughter and process meat

Topic

Taxability of Persons and Transactions

Date Issued

11-10-1994

November 10, 1994

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

Dear******

This will reply to your letter of August 22, 1994 in which you seek correction of a sales and use tax assessment on behalf of *********** (the "Taxpayer") for the period from November 1990 through September 1993.

FACTS

The Taxpayer operates a retail meat store and on the same premises slaughters animals and processes meat. The Taxpayer purchased various equipment and supplies for the processing operation and claims that these purchases qualify for the manufacturing exemption. The auditor determined that the processing operation was an incidental part of the retail business and, therefore, did not qualify for the exemption.

DETERMINATION

Code of Virginia §58.1-604 imposes a use tax "upon the use or consumption of tangible personal property in this Commonwealth...." Code of Virginia §58.1-609.3(2) 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 sale or resale.

Virginia Regulation (VR) 630-10-63 provides that for a business to obtain the manufacturing exemption, it must be (1) manufacturing products for sale or resale, and (2) such production must be industrial in nature. The issue in this case is whether the Taxpayer's slaughtering and processing of meat is industrial in nature.

Code of Virginia § 58.1 -602 provides that "industrial in nature" shall include, but not be limited to, those businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual. The Taxpayer's activities do not fall within codes 20 through 39, but rather are classified in code 5421, which encompasses "[e]stablishments primarily engaged in the retail sale of fresh, frozen, or cured meats ... Meat markets may butcher animals on their own account, or they may buy from others."

- Furthermore, in interpreting the manufacturing exemption, VR 630-10-63.B.1. 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. Establishments of this type include retailers such as ... meat and fish markets ... which process food products primarily for direct sale on the premises to consumers. (Emphasis added)

Based on the facts presented and a review of all the correspondence between the Taxpayer and the department, it is clear that the Taxpayer's slaughter and meat processing operation is an incidental part of its retail business. The auditor's workpapers indicate that during the audit period only the Taxpayer's wholesale sales were less than 15% of total gross receipts and fees charged for slaughtering animals totaled less than 6% of total gross receipts. Furthermore, the meat that is processed from the slaughtered animals is primarily for direct sale on the premises to consumers. Under the regulation cited above, this indicates that the processing operation is an incidental part of the retail business. Therefore, the activity is deemed to be nonindustrial in nature and the equipment purchased for use in the processing portion of the Taxpayer's business does not qualify for the manufacturing exemption provided by Code of Virginia §58.1 -609.3(2) .

The two rulings you cite to support your position are clearly distinguishable in that neither situation involved a retail establishment that was also manufacturing or processing. Furthermore, in P.D. 89-223 (8124189), the "industrial in nature" issue was not addressed. The issue in P.D.88-284 (10/26/88) was whether the equipment was used directly in processing products for sale or resale. In the Taxpayer's case, many of the items at issue are used directly in processing; however, the processing is deemed nonindustrial and does not meet the requirements established in VR 630-10-63.

Accordingly, the assessment is correct. The remaining audit balance is******* penalty plus **********interest computed through November 9, 1994). If you have any questions regarding this determination, you may contact********************.

Sincerely,

Danny M. Payne
Tax Commissioner

OTP/8420F

Rulings of the Tax Commissioner