Tax Type
Retail Sales and Use Tax
Description
Microbrewery not qualify for the industrial manufacturing exemption: Off site beer sales.
Topic
Manufacturing Exemption
Records/Returns/Payments
Date Issued
07-31-2012
July 31, 2012
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This reply is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period July 2007 through September 2009. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a business that includes an on-site restaurant and microbrewery. The Taxpayer sells beer at its restaurant as well as off-site to wholesale distributors. During the audit review, analysis of the Taxpayer's beer sales showed that they Taxpayer's on-site beer sales were 67% of its total beer sales. Based on the analysis, the auditor concluded that the Taxpayer did not qualify for the industrial manufacturing exemption and assessed the use tax on machinery, equipment and supplies used in the Taxpayer's brewery operations. The auditor relied on Title 23 of the Virginia Administrative Code (VAC) 10-210-920 D and Public Document (P.D.) 03-71 (10/15/03).
The Taxpayer protests the assessment of use tax and believes it qualifies as an industrial manufacturer based on its classification as a manufacturer with several governing authorities and presents additional documentation to demonstrate the growth of its off-site beer sales after the audit period. Additionally, the Taxpayer argues that the preponderance of its machinery's use is dedicated to the manufacturing process and refers to the same authorities cited by the auditor as support.
DETERMINATION
Industrial Manufacturing
Virginia Code § 58.1-609.3 2 and Title 23 VAC 10-210-920 provide that the retail sales and use tax does not apply to equipment, machinery, tools, repair parts and supplies used and consumed, in the industrial sense, by industrial manufacturers or processors to manufacture or process products for sale.
Title 23 VAC 10-210-920 B 1 states that "[e]stablishments which manufacture ...tangible personal property as an incidental part of a retail or service business...are generally deemed to be engaged in non-industrial activities."
In P.D. 03-71, the taxpayer operated a restaurant with an on-site microbrewery. The taxpayer's on-site beer sales comprised more than 50% of the taxpayer's total beer sales. The taxpayer believed it qualified as a manufacturer because beer brewing was classified as a manufacturing process in the SIC Code manual. In the ruling, the Tax Commissioner determined that although beer brewing was an industrial process, the Department would classify the taxpayer's activity as industrial in nature only when offpremise beer sales exceeded on-site sales. Based on an analysis of the taxpayer's sales, the Commissioner determined the beer brewing activity was incidental to the taxpayer's predominant activity, which was the on-premise retail sale of food and drinks.
Audit analysis of the Taxpayer's activity in this instance indicates its on-site beer sales were 67% of its total beer sales. Based on the sales volume analysis and the foregoing authorities, the auditor determined the Taxpayer's predominant activity to be nonindustrial in nature, classified under SIC Code sections 5812 and 5813 or North American Industry Classification Code sections 722211 (Limited Eating Places) or 722410 (Drinking Places).
When a retailer conducts a non-industrial business and manufactures or processes tangible personal property as an incidental part of that business, then those activities are also considered to be non-industrial. Accordingly, the machinery, equipment, tools, repair parts and supplies used by such establishments will not qualify for the manufacturing exemption. However, in determining whether manufacturing or processing is incidental to a business, the primary purpose of the business may be determined based on additional criteria other than retail sales. In Commonwealth v. Orange-Madison 220 Va.655, 261 S.E 2d 532 (1980), the Virginia Supreme Court citing the court in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), stated:
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- Nothing in Golden Skillet suggests, however, that a company otherwise entitled to claim an exemption for machinery and equipment used in industrial processing would be denied the exemption merely because it sold the processed goods at the retail level. Code § 58-441.6 [currently codified at Va. Code § 58.1-609.3 2] provides an exemption for machinery used in processing articles "for sale or resale" and in no fashion indicates that the processed products must be sold at the wholesale level in order for the processor to be entitled to the exemption. [Insert added.]
In P.D. 94-359 (11/28/94), the taxpayer operated a camera store that made retail sales, rentals and repairs of camera and video equipment. The taxpayer also developed film on the premises. The taxpayer argued that the film processing equipment and supplies were used directly in manufacturing activities and qualified for the manufacturing exemption. The ruling provided that in determining if manufacturing or processing was an incidental part of the business, the primary purpose of the business had to be established. The Tax Commissioner ruled that in addition to sales, the location of each activity, the size of the operation and percentage of floor space and number of activities attributable to each aspect of the business were also factors the Department could consider in determining the taxpayer's status or primary purpose. These determinants were not considered to be all-inclusive.
In the audit, the Taxpayer's primary purpose was deemed non-industrial based on the auditor's sales analysis. However, while the Taxpayer's sales may be included in an analysis of the Taxpayer's activity, it is not required to be the only measurement of the Taxpayer's qualification for the manufacturing exemption. The Taxpayer's predominant activity may be analyzed using the additional factors stated above to establish the primary purpose of the business and thus, its qualification for the exemption. Although the auditor was correct in the analysis of the Taxpayer's sales activity in accordance with P.D. 03-71, such analysis could have included the additional factors set out in P.D. 94-359 to decide the Taxpayer's predominant activity.
Preponderance of Use
In regard to the Taxpayer's position on this point, Title 23 VAC 10-210-920 D states:
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- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities.
The foregoing regulation explains that preponderance of use is applied when comparing the percentage of time a single item is used in an exempt industrial process or a taxable process. The preponderance of an item's use will determine whether it qualifies for the manufacturing exemption.
The Taxpayer cites the preponderance of its machinery's use to support that such machinery qualifies for exemption. However, the Taxpayer confuses preponderance of use with primary or predominant activity. As preponderance of use criteria is applied when the predominant activity is industrial in nature, the primary activity, must be established before the machinery's preponderant use can be determined.
Additional Documentation
The Taxpayer presents documentation to demonstrate the subsequent growth of its off-premise beer sales activity that occurred outside the audit period and is not applicable in this instance. Additionally, the Taxpayer's classifications regarding other governing authorities have no bearing on the Department's determination of the Taxpayer's activity for retail sales and use tax purposes.
CONCLUSION
After careful consideration of the facts related to this appeal, I find it is necessary to review the Taxpayer's business to consider the additional factors as noted in this determination. The results of that review will be addressed in a letter under separate cover.
The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings at *****.
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- Sincerely,
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Craig M. Burns
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- Tax Commissioner
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AR/1-4793524359.M
Rulings of the Tax Commissioner