Tax Type
Retail Sales and Use Tax
Description
Manufacturing, Processing, Assembling or Refining; Industrial context; Trophy and awards engraving business
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
03-10-1997
March 10, 1997
Re: § 58.1-1821 Application for Correction: Retail Sales and Use Tax
Dear*******************
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ********** (the "Taxpayer"), for the period January 1993 through December 1995. I apologize for the delay in responding to you.
FACTS
The Taxpayer engraves and assembles plaques, name tags, signs, and industrial labels and panels. The Taxpayer's engraving operation is highly automated through the use of computers and software designed to operate and control its engraving machinery. The Taxpayer sells its products for resale and it sells at retail to the final consumer.
The Taxpayer maintains that it is an industrial manufacturer and is entitled to a sales and use tax exemption on its purchases of equipment and supplies used directly in its engraving operations. In an audit of the Taxpayer, the department denied the manufacturing exemption based on a longstanding policy that considers trophy and awards businesses to be primarily retailers and the process of engraving to be incidental to the business of selling trophies and awards at retail.
DETERMINATION
Code of Virginia § 58.1-609.3(2)(iii) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining, or converting products for sale or resale..." The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), determined that the exemption cited above applied to establishments manufacturing in the industrial sense only. Code of Virginia § 58.1-602 provides, in part, that the term "industrial in nature" includes , but is not limited to, "those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual for 1972 and any supplements issued thereafter."
A review of the Standard Industrial Classification (SIC) codes for manufacturers reveals that the Taxpayer would be classified in SIC code sub-group 3479 if it meets the criteria for this sub-group. The SIC Manual states that establishments in this sub-group are primarily engaged in "... performing the following types of services on metals, for the trade..." (Emphasis added). The department has traditionally interpreted the phrase "for the trade" to mean businesses related to the same industry. While it appears that the Taxpayer sells engraved items to industrial users, its sales are not to businesses in the engraving industry and therefore, it is not performing engraving services "for the trade". In addition the Taxpayer makes a large number of retail sales to the final consumer. Based on the above, the Taxpayer would be more accurately classified in SIC code sub-group 5999, Miscellaneous Retail Stores, Not Elsewhere Classified.
Virginia Regulation (VR) 630-10-63 (B)(1) explains that the manufacturing exemption does not apply to retail or service businesses engaged in manufacturing or processing tangible personal property as an incidental part of their business. The department has traditionally considered businesses that sell engraved awards, trophies, plaques and similar items to be retailers and any manufacturing or processing performed by such businesses is incidental to their primary function of making retail sales. While the Taxpayer's operation may be highly automated, it is primarily competing with other retail trophy and awards businesses which do not enjoy the manufacturing exemption. I have enclosed a copy of P.D. 94-71 (3/18/94) which addresses a situation similar to yours.
Based on the foregoing, the assessment is correct. The department's records indicate that you have paid the assessments in full. If you have any questions, please contact********** in the Office of Tax Policy at ***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11320S
Rulings of the Tax Commissioner