Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Waste paper recycling
Topic
Taxability of Persons and Transactions
Date Issued
05-16-1996
May 16, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter dated December 5, 1995 in which you seek relief of tax and interest recently assessed on the sales and use tax audit of your client, **** (the "Taxpayer"), for the period June 1992 through May 1995.
FACTS
The Taxpayer is in the business of producing and processing paper. In addition to its paper manufacturing business, the Taxpayer also has a separate division that recycles its waste paper and waste paper products purchased from outside suppliers. During a recent audit, it was determined by the auditor that the Taxpayer's paper manufacturing process enjoyed the industrial manufacturing and processing exemption afforded under Code of Virginia § 58.1-609.3.2, however, the recycling operation did not.
The recycling operation consists of analyzing wastepaper received and sorting it into twelve distinct products based on the quality of the paper. After the sorting is completed, the various grades of paper are baled and sold to paper mills for conversion into finished products. The Taxpayer is of the opinion that the recycling operation, e.g. sorting, grading, and baling functions, renders the waste paper more marketable and useful, thus qualifying the recycling operation as industrial processing and therefore exempt from the tax. The Taxpayer is requesting that the tangible personal property associated with its recycling operation be removed from the audit.
DETERMINATION
Code of Virginia § 58.1-609.3.2 provides an exemption from the sales and use tax for machinery and equipment, tools, supplies, etc., used directly in the production of products for sale or resale by industrial processors. The term "processing" was defined by the Virginia Supreme Court in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980) as requiring that a product undergo a treatment rendering it more marketable or useful.
Virginia Regulation (VR) 630-10-63.B.1 defines industrial processor to include establishments engaged in the treatment of material, substances, or other products in such a manner as to render such products more useful or marketable. As a general rule, the department looks to the Standard Industrial Classification (SIC) Manual published by the U.S. Department of Commerce to determine those industries which qualify as "industrial processors or manufacturers." Industrial processors and manufacturers include those industries included in, but not limited to, SIC codes 10 through 14 and 20 through 39.
Based upon the department's review of the Taxpayer's recycling operation, it does not appear that its operation falls within codes 10 through 14 and 20 through 39 of the SIC Manual, nor does it appear that its recycling operation is substantially similar to other businesses classified within these codes. Our review indicates that the Taxpayer's recycling operation is more aptly defined under SIC code 5093 which addresses establishments engaged in assembling, breaking up, sorting, and wholesale distribution of scrap and waste materials, including paper.
In addition, the recyclable waste paper does not in itself undergo any treatment or change which would render the paper more marketable or useful as provided by the Virginia Supreme Court in Commonwealth v. Orange-Madison cooPerative. While the department recognizes that the baling of the paper may enhance the sale of the paper, the characteristics of paper remain the same before and after the baling process. It has been the longstanding policy of the department that sorting and baling of paper does not constitute industrial processing. [See P.D. 94-160 (5/20/94) and P.D. 94-242 (8/10/94) enclosed]. If the Taxpayer can provide additional information demonstrating that the paper undergoes some sort of process, e.g. cutting, shredding, or compressing, rendering it more marketable, I will agree to re-evaluate the industrial processing issue.
Based on the foregoing, the department finds no basis for revising the audit at this time. If you should have any additional information to provide, please contact******Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10626K
Rulings of the Tax Commissioner