Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling or refining; Lumber wholesaler
Topic
Taxability of Persons and Transactions
Date Issued
04-29-1997
April 29, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This is in reply to your letter of February 28, 1997, in which you seek correction of a retail sales and use tax assessment issued to **********(the "Taxpayer") for the period January 1992 through January 1997.
FACTS
The Taxpayer operates a woodyard, selling wood to various customers. In its operation, the Taxpayer purchases logs from harvesters. The logs are stockpiled in the woodyard and separated based on the type of wood (soft hardwood and hard hardwood). The Taxpayer loads the soft hardwood by the truckload for one market and the hard hardwood by the truckload for another market.
An audit by the department resulted in the assessment of tax on the purchase of equipment used to handle the logs. The Taxpayer believes it is an industrial processor and qualifies for the exemption provided under Code of Virginia § 58.1-609.3(2). The Taxpayer asks that the equipment and related items (loaders, and parts, fuel, and lubricants for the loaders) be removed from the audit.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the retail 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. 665, 261 S.E.2d 532 (1980) as requiring that a product undergo a treatment rendering it more marketable or useful.
Under Title 23 Virginia Administrative Code (VAC) 10-210-920, an industrial processor is defined to include establishments engaged in the treatment of material, substances, or other products in such a manner as to render such products more marketable or useful. 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 on the department's review of the Taxpayer's 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 woodyard operation is substantially similar to other businesses classified within these codes. The Taxpayer's woodyard appears to fall under SIC code 5099, which addresses establishments engaged in the wholesale distribution of durable goods, including forest products.
Furthermore, the logs do not undergo a treatment to make them more marketable or useful. The logs arrive at the woodyard directly from harvesters. The logs are sorted, sold to customers, and loaded for delivery. The logs are in the same form or state after being separated by wood type. It has been the longstanding policy of the department that sorting does not constitute industrial processing. See P.D. 94-160 (5/20/94) and P.D. 94-242 (8/10/94), copies enclosed.
Based on the foregoing, the operations at the woodyard do not constitute industrial processing and do not qualify for the exemption provided under Code of Virginia § 58.1--609.3(2). Accordingly, the assessment is correct. The Taxpayer will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest
If you have any questions regarding this matter, you may contact *******of the Department's Office of Tax Policy at********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12295F
Rulings of the Tax Commissioner