Retail Sales and Use Tax
Manufacturing, processing, assembling or refining; Exemptions; Embroidery machine
Taxability of Persons and Transactions
December 23, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in reply to your letter in which you seek correction of sales and use tax assessed
to******* (the "Taxpayer") for the period August 1992 through July 1995. I apologize for the delay in responding to your letter.
The Taxpayer is engaged in screen printing and custom embroiders garments and other items for resale and for sale to end users. As a result of the audit, the Taxpayer was assessed tax on the purchase of an embroidery machine used in its operations. The Taxpayer believes that its operations qualify as manufacturing, and the purchase of the embroidery machine is exempt under Code of Virginia § 58.1-609.3(2). The Taxpayer distinguishes this case from a similar situation discussed in P.D. 94-71 (3118194) which held this same type of machine taxable.
Code of Virginia §58.1-609.3(2)(iii) 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. This interpretation was supported by the Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), which held that the cited statute and regulation were intended "to provide exemption for machinery and tools used in...manufacturing...products for sale or resale only in the industrial sense." Code of Virginia §58.1-602 provides, in part, that the term "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 (SIC) Manual for 1972 and any supplements issued thereafter.
P.D. 94-71 dealt with a taxpayer engaged in custom embroidery and silk-screening of apparel products who was held taxable on the purchase of an embroidery machine. The taxpayer in that case performed work for industry customers, but its primary activity constituted sales to end users. It was determined that the taxpayer's predominant activity of providing customized embroidery on garments and other apparel for other than industry or trade customers was characteristic of businesses that are deemed service providers. As such, the Tax Commissioner concluded that the taxpayer did not fall within the SIC codes prescribed for purposes of being designated as industrial in nature and therefore did not qualify for the manufacturing exemption.
The Taxpayer embroiders logos, customer identification, advertising slogans and other printing on shirts, jackets, banners and similar items. The Taxpayer's predominant activity is comprised of sales of these products to end users. Similar to the taxpayer in P.D. 94-71, the Taxpayer falls within the SIC code sub-group 7389 which categorizes businesses engaged in embroidering of advertising on shirts, etc., as service providers. Because the Taxpayer's predominant activity does not satisfy the industrial in nature requirement, the manufacturing exemption is not available.
The SIC codes clearly distinguish between embroidery activities that fall under an industrial classification and those activities which fall within the scope of services. For example, SIC code 2395 specifically applies to businesses engaged in embroidering products for related businesses within the industry who generally will resell to end users. The Taxpayer's predominant activity involves embroidering products for sale directly to end users for their own use and consumption. This activity does not constitute embroidering products as contemplated in SIC code 2395.
Based on the foregoing, there is no basis to revise the assessment. The Taxpayer will receive an updated bill with interest accrued through the date of the Taxpayer's letter of protest and should be paid within 30 days to avoid the accrual of additional interest charges. If you have any questions concerning the policy set forth in this letter, you may contact *****************at*********************.
Danny M. Payne