Tax Type
Retail Sales and Use Tax
Description
Prescription eyeglasses and contact lenses
Topic
Taxability of Persons and Transactions
Date Issued
09-25-1996
September 25, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter of April 19, 1995, in which you apply for correction of an assessment issued to ************* (the "Taxpayer"), for the period January 1988 through November 1990. I apologize for the delay in responding to you.
FACTS
The Taxpayer makes retail sales of prescription eyeglasses and contact lenses. Orders for prescription lenses are taken at the Taxpayer's retail locations. The lenses are ground and the eyeglasses assembled at a separate facility owned by the Taxpayer. This facility does not make retail sales. The Taxpayer also grinds lenses at its facility for sale to other retailers. The Taxpayer maintains that the grinding of lenses and the assembly of eyeglasses is a manufacturing operation and that certain purchases in the audit were used directly in the manufacturing operation. For this reason, the Taxpayer suggests that the manufacturing exemption should apply to certain tangible personal property in the audit.
The Taxpayer seeks the removal of sales of eyeglass frames and sunglasses which it maintains were sold on the work order of a licensed optician. The department considered the sales taxable because the Taxpayer could not provide a prescription or work order for the sales.
DETERMINATION
Manufacturing Exemption
Code of Virginia § 58.1-609.3(2) (copy enclosed) 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 in the industrial sense. Virginia Regulation (VR) 630-10-63(B) 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 states that only those items used directly in the manufacturing process are exempt. Machinery, tools, or supplies 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 to qualify for exemption.
The department previously ruled in P.D. 86-52 (March 17, 1986, copy enclosed), that a retail business which conducts a processing operation separate from its retail operations may qualify for exemption as an industrial processor. In this case, the Taxpayer operates a facility that is separate from its retail locations. The Taxpayer also grinds lenses for sale to other retailers and this activity makes up a significant portion of the revenue generated by the Taxpayer's facility. Based on the information presented, the Taxpayer's grinding of lenses and assembly of eyeglasses at a separate plant site is not incidental or secondary to its retail operations; thus, the processing exemption would apply to purchases of items "used directly" by the Taxpayer in its manufacturing facility. "Used directly" is defined in Code of Virginia § 58.1-602 as "... those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration."
The audit will be adjusted to remove those purchases which qualify for the manufacturing exemption. I have enclosed a copy of the Virginia Retail Sales and Use Tax Regulations to assist you with any questions you may have concerning the application of the manufacturing exemption to your operations.
Sales of Eyeglass Frames and Sunglasses
The Taxpayer seeks the removal of certain sales of eyeglass frames, frame parts, and sunglasses from the audit. Code of Virginia § 58.1-609.7(1) (copy enclosed) provides an exemption for contact lenses and eyeglasses "... dispensed by or sold on prescriptions or work orders of ... optometrists, ophthalmologists, opticians, ..." The sales in question were listed in the audit workpapers because the Taxpayer could not produce a prescription or work order showing that the items were sold on prescriptions or work orders.
VR 630-10-65(D)(5) states that "... sales of eyeglass frames or repair parts for prescription eyeglasses are exempt from the tax if the prescription for the glasses is on file with the person replacing or repairing the eyeglass frames." If the Taxpayer can provide documentation that the contested sales are exempt, the sales will be removed from the audit. The Taxpayer should contact the department's ***** District Office at **** to arrange a review of the sales documentation.
Penalty and Interest
The Taxpayer also requests the waiver of penalty and interest accrued since the audit assessment was issued. A use tax compliance penalty was assessed in accordance with VR 630-10-80. The regulation in effect during the audit period requires taxpayers to have at least a 50 percent use tax compliance ratio in second audits. Since the Taxpayer's compliance ratio was 0 percent in its second audit, a compliance penalty was assessed. Based on the regulation cited above, I am unable to waive the penalty in its entirety. The removal of items used directly in the Taxpayer's manufacturing plant from the audit will result in a***reduction of the penalty. The new balance is .
The interest was assessed in accordance with Code of Virginia § 58.1-635(C) (copy enclosed) which states that "[i]nterest at a rate determined in accordance with § 58.1-15, shall accrue on the tax until the same is paid, or until an assessment is made, pursuant to § 58.1-15, after which interest shall accrue as provided therein." While I am unable to waive the interest accrued since the date of assessment, I will allow the Taxpayer thirty days to pay the uncontested interest amount of****computed through April 14, 1995. Additional interest may be due on the remainder of the assessment depending on the resolution of the sales portion of the audit.
I will allow the Taxpayer ninety days to contact the department's ***District Office to review the documentation requested above. You may contact **** in the Office of Tax Policy at ***** if you have any questions concerning this matter. You may send payment of ***** which represents the current balance of penalty and interest, to
in the Office of Tax Policy at P. O. Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9618S
Rulings of the Tax Commissioner