Tax Type
BPOL Tax
Local Taxes
Description
Sales at wholesale from place of manufacture
Topic
Exemptions
Local Power to Tax
Date Issued
03-27-1997
March 27, 1997
Re: Request for Advisory Opinion: BPOL
Dear****************
This will respond to your facsimile dated February 25, 1997, regarding the classification and taxability of cement mixers.
The license tax is a local tax which is imposed and administered by local officials. The Code of Virginia limits the involvement of the Department of Taxation to promulgating guidelines and issuing advisory opinions. However, the department shall not be required to interpret any local ordinance.
While addressing the question raised in your letter, this response is intended to provide advisory guidance only and does not constitute a formal or binding ruling.
FACTS
A company located within your locality provides mixed cement to sites in your locality and in adjoining localities. The company sells the cement at the corporate site. Ingredients (sand, concrete, fiber, etc.) are poured into the mixing unit and mixed in route. The deliveries are made to home construction sites, local industries, municipal government job sites and to private homeowners. You ask whether the company is a manufacturer and whether its sales ate taxable under retail sales or exempt.
OPINION
Manufacturing
The Court held in Prentice v. City of Richmond, 197 Va. 724, 729-30 (1956), copy enclosed, that for an activity to be considered manufacturing, three elements are necessary: "' (1) original material referred to as raw material; (2) a process whereby the raw material is changed, and (3) a resulting product which ... is different from the original raw material."' See also Appendix B, 1997 BPOL Guidelines, copy enclosed. The sand, concrete, fibers and other ingredients are the raw materials. The determining question here is whether the sand, concrete and fiber is changed and whether the resulting cement is different than the original raw material.
In Solite Corporation v. County of King George, 220 Va. 661 (1980), copy enclosed, the Court held that "[t]he mere blending of various ingredients, in the absence of transformation into a product of substantially different character, is not manufacturing." The process of turning raw materials into cement has been addressed twice by the Attorney General. In the Attorney General's Opinion of September 5, 1975, copy enclosed, which was issued prior to the Solite decision, the Attorney General concluded that the production of ready-mix concrete is manufacturing. The Attorney General's rational was that since the production of ready-mix concrete was manufacturing for sales and use tax purposes, it would be manufacturing for license tax purposes. However, in the Attorney General's opinion of November 6, 1984, copy enclosed, which was decided after Solite, a business bought, dried and stored bulk quantities of sand, rock and cement. These dry ingredients were then mixed and poured into bags, pails and boxes for sale. The Attorney General concluded that once the raw materials were processed, the raw materials were the very same raw materials, only combined. This process was not manufacturing since the raw materials were not transformed into products of a substantially different character.
In the instant case, the facts can be distinguished from the November 6, 1984 Attorney General Opinion. In another Attorney General's Opinion of April 11, 1995, copy enclosed, the Attorney General concluded that the mixture of powdered tea or other flavoring and sugar with water, creates a product which is substantially transformed from its raw ingredients. The mixture of sand, concrete and fiber in the truck creates cement. Cement is a paste that hardens into a solid mass. It is substantially different than its raw ingredients. Raw materials cannot be used until they are further processed. Thus, the act of transforming ingredients into cement is manufacturing.
Taxability of Sales
Code of Virginia § 58.1-3703 C 4, copy enclosed, states that no locality shall impose a license tax or fee "[o]n a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture.” Retail sales from the place of manufacture are taxable. The determinative questions are whether the company's sales of cement are retail or wholesale, and if the sales are wholesale, whether they are being made at the place of manufacture.
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- § 1 of the 1997 BPOL Guidelines, copy enclosed, defines wholesale sale as:
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- a sale of goods, wares and merchandise ... [which] includes sales to institutional, commercial, industrial and governmental users which because of the facts and circumstances surrounding the sales, such as the quantity, price, or other terms, indicate that they are consistent with sales at wholesale.
Some of the sales may be retail or wholesale depending on the facts and circumstances surrounding the sales of the cement to the customers. For example, sales of cement directly to homeowners are retail sales since homeowners are not institutional, commercial, industrial or governmental users. Gross receipts derived from such sales are subject to the BPOL tax. Sales made to institutional, commercial, industrial or governmental users are clearly wholesale.
A manufacturer's place of manufacture is the site where raw materials are subjected to the process that changes the raw materials into the new product. In the instant case, the cement ingredients are mixed together in a truck at the corporate site. Thus, the corporate site would be the place of manufacture. The mixture of the cement while the truck is in transit is an ancillary activity. Ancillary activities are part of the manufacturing function, but do not rise to the level of becoming a separate business activity. See § 7.3 of the 1997 BPOL Guidelines, copy enclosed.
According to the facts provided, sales activities occur at the corporate site. Manufacturing activities also occur at the corporate site. Thus, the wholesale sales of cement would be exempt from the BPOL tax. This includes sales to municipalities for their own use.
I hope that the above information will be beneficial to you. Although I believe this letter conforms with the law, it is written only for your guidance, and the final determination is with the locality.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12230B
Rulings of the Tax Commissioner