Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Modular display systems
Topic
Taxability of Persons and Transactions
Date Issued
05-01-1996
May 1, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter of May 11, 1995, seeking correction of a sales and use tax assessment to your client*****(the "Taxpayer") for the period August 1991 through September 1994.
FACTS
The Taxpayer, an exhibit designer, fabricates graphics and customizes display systems to customers' specifications on a purchase order basis. The Taxpayer is also engaged in the rental of modular display systems. As a result of the department's audit, an assessment was made for certain untaxed purchases used in the fabrication of the modular display systems. The Taxpayer contends that its fabrication operation is that of a manufacturer based on such designation for purposes of local taxation and therefore, qualifies for exemption under Code of Virginia § 58.1-609.3(2).
DETERMINATION
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 an industrial sense. This interpretation was substantiated 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 was 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 that the term "industrial in nature" shall include all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual."
Generally, businesses engaged in manufacturing are classified under SIC codes 20 through 39 and are involved in transforming raw materials into useful and marketable products within a factory, plant or mill environment using power driven machinery and materials handling equipment. Manufacturing production is usually carried on for the wholesale market, for interplant transfer, or to order for industrial users, rather than for direct sale to the domestic consumer. (See SIC manual, page 67).
In the department's previous determination of June 5, 1990, the Taxpayer was deemed to be essentially involved in the fabrication of prefabricated panels and classified under SIC code 7389, miscellaneous business services - the building of exhibits by industrial contractors. The department concluded that the Taxpayer's production activities were not industrial in nature and that tangible personal property purchased for use in the fabrication of special order exhibits did not qualify for the manufacturing exemption. There has been no information presented to indicate that the nature of the Taxpayer's business has changed.
The Taxpayer's classification as a manufacturer for local tax purposes does not necessarily confer such status for purposes of the sales and use tax. The Virginia sales and use tax law requires a manufacturing operation to be "industrial" in nature to enjoy the manufacturing exemption. The definition of manufacturing for local business license tax purposes does not include such a requirement.
My decision is governed by the department's policy with respect to exemption from the sales and use tax as dictated by the rule of strict construction established by the Virginia courts. The Virginia Supreme Court has consistently held that "exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." See Golden Skillet Corporation.
Accordingly, there is no basis for adjustment to the assessment. A notice of assessment, with interest accrued to date, will shortly be issued. No additional interest will accrue on the outstanding assessment provided full payment is made within 30 days. If you have any questions regarding this letter, you may contact*****of the department's Office of Tax Policy at********.
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Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9729T
Rulings of the Tax Commissioner