Tax Type
Retail Sales and Use Tax
Description
Mill shop operation; Retailer vs. manufacturer
Topic
Collection of Delinquent Tax
Taxability of Persons and Transactions
Date Issued
03-31-1999
March 31, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear******************
This is in reply to your letter in which you seek correction of the retail sales and use tax audit of ***** (the "Taxpayer') for the period of January 1995 through December 1997.
FACTS
The Taxpayer is in the business of selling building materials both on the retail and wholesale level. In addition to their retail building supply operation, the Taxpayer also operates a door fabrication facility and mill shop. The sale of doors produced by the mill shop constitutes approximately 30% of the Taxpayer's retail business. The Taxpayer was audited and assessed tax on the machinery and equipment used in the mill shop operation. The Taxpayer believes that the door fabrication and mill shop operation constitutes industrial manufacturing and all equipment used in this operation should be exempt from the retail sales and use tax as provided under Code of Virginia § 58.1-609.3(2).
DETERMINATION
Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery or tools, and other items used directly in the manufacture of tangible personal property for sale or resale in the industrial sense. This interpretation was sustained 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 and regulation were intended "to provide exemption for machinery and tools used in ... manufacturing ... products for sale or resale only in the industrial sense.' In addition, Code of Virginia § 58.1-602 provides, in pertinent part, 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.''
Based on the nature of your operation, there is no question that the Taxpayer is producing wooden doors for sale or resale. Therefore, the manufacturing exemption available to the Taxpayer hinges on the fact of whether or not the Taxpayer's mill shop operation is industrial in nature. In reading the SIC Manual, the Taxpayer is of the belief that its operation falls under Major Group 24, Lumber and Wood Products, Except Furniture. More specifically, sub-group 2431 provides that "establishments primarily engaged in manufacturing fabricated wood millwork' which includes wooden doors, door jams and door trim. The determinative factor in the above classification rests on the word "primarily.' Based on the information provided by the auditor, the mill shop operation accounts for approximately 30% of the Taxpayer's total sales, with the remainder being the retail sales of building material not produced by the Taxpayer.
The department generally considers "primarily' or "principally' as being more than 50%. This being the case, the department takes the position that the Taxpayer's business is more aptly classified under Major Group 52 of the SIC Manual, which includes retail establishments "primarily' engaged in selling lumber and other building materials. In light of the fact that the majority of the Taxpayer's sales (70%) are of building materials not produced by them, I find that the Taxpayer's mill shop operation is incidental to its retail establishment and therefore does not enjoy the manufacturing exemption.
Based on the above, I find that the mill shop equipment was properly held taxable in the audit. If you should have any questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13916K
Rulings of the Tax Commissioner