Tax Type
Retail Sales and Use Tax
Description
Non-industrial fabrication; construction material sales to churches
Topic
Exemptions
Property Subject to Tax
Date Issued
03-18-1994
March 18, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will reply to your letter of February 25, 1992 in which you seek correction of a sales tax assessment for**********( the "Taxpayer") for the period October 1988 through June 1991.
FACTS
The Taxpayer operates a combination lumber yard and hardware store. The Taxpayer purchased a shaper, door machine and dust collector with supporting equipment and parts used for the fabrication of doors, which it sells to its customers. The Taxpayer claims that these purchases qualify for the manufacturing exemption; the auditor determined that the requirements to satisfy the exemption were not met and assessed use tax. Tax was also assessed on certain purchases made by churches under exemption certificates. The Taxpayer asserts that it accepted the certificates in good faith and, therefore, it should not be liable for the tax on such purchases.
DETERMINATION
Manufacturing exemption: Va. Code §58.1-604 imposes the tax "upon the use or consumption of tangible personal property in this Commonwealth...." Va. Code §58.1-609.3(2) (formerly 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 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 fabrication of doors is industrial in nature.
VR 630-10-63 provides 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 5211 which is designated as "Lumber and Other Building Materials Dealers." 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 door fabrication operation is clearly an incidental part of its business of the retail sale of lumber and hardware.
Because, the Taxpayer's business is not industrial in nature, the equipment purchased for use in fabricating doors does not qualify for the manufacturing exemption and is subject to the sales and use tax.
Purchases by churches: You contend that the Taxpayer accepted exemption certificates for purchases by churches in good faith and, therefore, should not be responsible for the tax. The auditor determined that the purchases were taxable, as they did not fall within the scope of the statutory exemption.
VR 630-10-20 provides that "reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate." (Emphasis added).
Acceptance "in good faith" must be established by the dealer. The property actually purchased must be of the same class as that identified on the certificate as exempt. Thus, acceptance in good faith requires that the dealer examine the certificate for compliance with VR 630-10-20 before a tax-free sale takes place.
The exemption certificate available to certain nonprofit churches (Form ST-13A) clearly specifies the types of purchases which may be made exempt from the Virginia retail sales and use tax. In addition, the certificate states at the bottom "NOTE: This exemption certificate does not provide exemption for any tangible personal property purchased by a church other than that specified above." This language, along with the requirements under VR 630-10-20 noted above, imposes a duty on the dealer to ask the purchaser about the use of the property purchased.
Furthermore, building and construction materials are not covered by the wording on Form ST-13A. This is consistent with VR 630-10-22.1(D), which specifically identifies building and construction materials as taxable purchases.
Because the Taxpayer was responsible for ensuring that the purchases were consistent with the language of the exemption certificate and failed to do so, and because the particular purchases could not be purchased exempt from the tax under the regulations, I find that the Taxpayer did not accept the exemption certificates in good faith. Consequently, the Taxpayer is liable for the tax which should have been collected.
Accordingly, the assessment is correct as made.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6014F
Rulings of the Tax Commissioner