Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Audio and videotape production; Single site requirement
Topic
Taxability of Persons and Transactions
Date Issued
01-31-1997
January 31, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************************
This will reply to your letter in which you seek correction of the retail sales and use tax audit of your client, *********(the "Taxpayer") for the period of June 1992 through May 1995.
FACTS
The Taxpayer is in the business of producing audio and video tapes. The Taxpayer is not involved in the directing, writing, or creative development of the audio or video tapes. The Taxpayer's process involves eight steps as follows: I) recording, ii) motion control, iii) film-to-tape and color correction, iv) video graphics and animation, v) mixing, vi) on-line and off-line editing, vii) captioning, and viii) audio and video tape duplication and conversion. The Taxpayer's products may undergo all, or any combination, of the above activities. The Taxpayer was audited and assessed tax on all the equipment used in the above activities at the Taxpayer's****************location. The Taxpayer feels they qualify as an industrial manufacturer and all equipment is exempt.
The Taxpayer is of the opinion that their activities are classified under industry code number 3652 of the Standard Industrial Classification (SIC) Manual, thus rendering them an industrial manufacturer for retail sales and use tax purposes. This code section classifies "establishments primarily engaged in manufacturing phonographic records and prerecorded audio tapes and disks" as industrial manufacturers.
In further support of the Taxpayer's position, the County of ********* approved the issuance of industrial development bonds to the finance the acquisition, construction, and equipping of a 28,000 square foot facility to be used by a joint venture between the Taxpayer and a third party to produce audio and video products in a manner identical to the manner the Taxpayer is currently producing audio and video tapes. These bonds were approved for issuance in accordance with the Industrial Development and Revenue Bond Act (Chapter 33, Title 15.1, Code of Virginia) which authorizes municipalities to issue revenue bonds for the purpose of promoting industry by inducing manufacturers to locate or remain in Virginia. Based on ******* County's characterization of the joint venture's operation, the Taxpayer feels the retail sales and use tax manufacturing exemption should apply.
DETERMINATION
Code of Virginia § 58.1-609.3.2 provides, in part, an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies used directly in... manufacturing... products for sale or resale." In accordance with Virginia Regulation (VR) 630-10-63.A, copy enclosed, to qualify for the industrial manufacturing exemption a business must meet all of the following four requirements:
1) The business must be manufacturing for sale or resale;
2) The production process must be industrial in nature;
3) The machinery, tools and repair parts purchased must be used directly in the manufacturing or processing operation; and
4) All manufacturing and processing activities must be conducted at a single plant site.
The department's position with respect to the above statute and regulation was supported by the Virginia Supreme Court decision in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2n 511 (1973), where it stated "it is intended... to provide exemption for machinery and tools used in... manufacturing... products for sale or resale only in the industrial sense." (Emphasis added).
As the Taxpayer has established that they are producing audio and video tapes for sale or resale, the first test for the exemption is met. Next, the department must determine whether the Taxpayer's production activities are industrial in nature. Code of Virginia § 58.1-602, under the definition of "manufacturing", and VR 630-10-63 both provide that the term "industrial manufacturer" shall include, but not be limited to, businesses classified or substantially similar to those classified in codes 10 through 14 and 20 through 39 of the SIC Manual.
The Taxpayer takes the position that they should be classified under SIC number 3652. Code number 3652 provides that establishments primarily engaged in manufacturing phonograph records and prerecorded audio tapes and disk are industrial in nature.
While the Taxpayer may reproduce audio tapes, based on the description of the Taxpayer's operation in your letter, this is not primarily the type of operation in which the Taxpayer is engaged. For this reason, l do not feel the Taxpayer's operation can be classified under SIC number 3652.
The manufacturing exemption is not limited to business classified in codes 10 through 14 and 20 through 39 of the SIC Manual. However, based on opinions of the Virginia Supreme Court in Golden Skillet and Commonwealth v. Orange-Madison, 220 Va. 655, 261 S.E.2d 532 (1980), I cannot conclude that the Taxpayer's production activities are industrial in nature. In both cases, the court noted that the exemption was available "only to true manufacturers or industries".
Notwithstanding the fact the Taxpayer's operation is not "industrial" in nature, the eight activities provided by the Taxpayer are not all carried on at the same location. As provided by the auditor, the Taxpayer has locations in ******* and throughout *****. Each location specializes in one or more of the activities provided by the Taxpayer. This would deny the Taxpayer claim for the exemption based on the "single plant site" criteria set forth above.
While the Taxpayer's upcoming joint venture may be classified as a manufacturing facility by the County of ********such a determination has no direct bearing on this matter. This is because the laws permitting localities to impose license tax refer to manufacturers in general, while the sales and use tax law refers to industrial manufacturers. As specifically noted by the court in Golden Skillet, the sales and use tax law is more restrictive than the laws relating to local licensing tax.
Based on all of the foregoing, all the equipment used by the Taxpayer in producing audio and video tapes was properly included in the department's audit. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at*******
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11877K
Rulings of the Tax Commissioner