Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Steel cutting machinery
Topic
Taxability of Persons and Transactions
Date Issued
05-23-1997
May 23, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This is in reply to your letter in which you seek correction of sales and use tax assessed to your client, ********** (the "Taxpayer"), for the period June 1995 through January 1997.
FACTS
The Taxpayer is engaged in sales of steel on a wholesale basis. Approximately 40-50% of the Taxpayer's operation is attributable to computer aided design burning and cutting of steel for customers. As a result of the department's audit, the Taxpayer protests the tax assessed on equipment purchases used primarily in the steel cutting portion of its business.
The Taxpayer asserts that its steel cutting operation constitutes fabrication as described in Title 23 of the Virginia Administrative Code (VAC) 10-210-560 (formerly Virginia Regulation 630-10-37). The Taxpayer believes that such fabrication activities are classified under Group 34 - Fabricated Metal Products of the Standard Industrial Classification (SIC) and would qualify the protested equipment purchases for exemption pursuant to Code of Virginia § 58.1-609.3(2).
DETERMINATION
VAC 10-210-560 defines fabrication as an operation that changes the form or state of tangible personal property.
Code of Virginia § 58.1-609.3(2) 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 the industrial sense. This exemption was interpreted 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 SIC Manual.
It may be a true that a significant portion of the Taxpayer's business operation is devoted to activities that constitute fabrication. This, however, does not automatically entitle the Taxpayer to qualify as a manufacturer in the industrial sense. The cited caselaw requires that we look to the SIC classification of the Taxpayer to determine whether the Taxpayer's activities qualify as industrial in nature.
According to a review of the 1987 edition of the SIC Manual, Group 34 includes businesses manufacturing metal products such as cans, tinware, hand tools, cutlery, general hardware, structural metal products, metal forgings and other miscellaneous metal and wire products. The Taxpayer's wholesale steel activities do not fall under Group 34, but rather are classified under Group 50 - Wholesale Trade, specifically subgroup 5051 - Steel - wholesale. This is consistent with the Taxpayer's classification for income tax purposes.
Based on the Taxpayer's activities and the above SIC classifications, l must agree that the auditor correctly denied the manufacturing exemption and properly assessed the tax on the equipment purchases used in the Taxpayer's steel operations. As such, the assessment is upheld.
The Taxpayer will receive an updated bill which should be paid within 30 days in order to avoid the accrual of additional interest charges. If you have any questions, you may contact********** at **********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12429J
Rulings of the Tax Commissioner