Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, manufacturing exemption, restaurant with an onsite brewery
Topic
Collection of Delinquent Tax
Date Issued
05-14-1999
May 14, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear******
This will reply to your letter in which you, on behalf of your client, ******* the ( "Taxpayer'), seek correction of a retail sales and use tax assessment for the period of September 1996 through May 1998.
FACTS
The Taxpayer's operation consists of a restaurant with an onsite brewery. In addition to the restaurant and onsite beer sales, the Taxpayer had arranged with a local distributor to distribute its product. The Taxpayer purchased all brewing equipment tax exempt under the premise that it was operating as a manufacturer and enjoyed the manufacturing exemption for its brewing operation. The Taxpayer was audited, and it was determined by the auditor that the Taxpayer's brewing operation was incidental to its retail restaurant business. Accordingly, tax was assessed on all brewing equipment. The Taxpayer is taking exception to the taxing of the brewing equipment.
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides a sales and use tax exemption for "machinery or tools or repair parts therefor or replacement thereof ... used directly in processing, manufacturing ... products for sale or resale.' The department has traditionally limited the manufacturer's exemption to manufacturing processes that are industrial in nature. Title 23 of the Virginia Administrative Code (VAC) 10-210-920.B (copy enclosed) provides that "establishments which manufacture ... tangible personal property as an incidental part of a retail establishment ... business are generally deemed to be engaged in non-industrial activities.' (Emphasis added). This regulation goes on to provide that establishments of this type include restaurants which process food products primarily for direct sale on the premises to consumers.
The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), has interpreted the manufacturing exemption to apply to machinery and tools used in manufacturing products for sale or resale when used in the industrial sense. The court determined in Golden Skillet that restaurants which prepared fried chicken for sale at retail were not industrial operations and were not entitled to the industrial manufacturing exemption.
Code of Virginia § 58.1-602 states that the term "industrial in nature' shall include all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual.' A review of the SIC Manual reveals that "establishments primarily engaged in the retail sale of prepared foods and drinks for on-premise or immediate consumption' are classified under SIC Code 5812 - Eating Places which includes restaurants. This position is supported by P.D. 94-337 (11/10/94) and P.D. 96-250 (9/27/96), copies enclosed.
Based on all of the above, I find that the Taxpayer's operation does not qualify for the industrial manufacturing or processing exemption and that the audit assessment is proper. However, Code of Virginia § 58.1-105, copy enclosed, grants to the Tax Commissioner the authority to accept an offer in compromise if the assessment is of doubtful collectibility. Based on information you have provided in your letter, I have enclosed a Collection Information Statement for Businesses, Form CS-21. If you would like to file an offer in compromise, please complete the enclosed form. Upon completion of the department's review, I will issue a response based on the information presented.
Please return the completed form CS-21 to the Collections Section, Offer in Compromise Team, P.O. Box 1880, Richmond, Virginia 23218-1880. You may also contact a member of this team at *****. If you should have any questions, please contact ***** Office of Tax Policy, at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17535K
Rulings of the Tax Commissioner