Tax Type
Retail Sales and Use Tax
Description
Determining whether an operation is industrial
Topic
Appropriateness of Audit Methodology
Basis of Tax
Date Issued
09-22-1982
September 22, 1982
Re: 58-1118 Application/Sales and Use Tax
Dear ***************
This letter will reply to your correspondence of May 28, 1982 and the subsequent hearing of September 9, 1982 in which you apply for correction of sales and use tax assessed against your client, **************** as the result of a recent audit.
Facts
*********** is engaged in the production of precision machine parts. *************employs two full-time and five part-time production personnel, estimates annual sales to be approximately $150,000, occupies a plant of approximately 3,500 square feet, and sells primarily to the United States Department of the Navy and industrial manufacturers.
Determination
§ 58-441.6 of the Code of Virginia exempts from the sales and use tax machinery and tools, fuel, power, and supplies used in manufacturing. The Virginia Supreme Court, in Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), supported the department's position that this exemption was applicable only to persons manufacturing in the industrial sense.
In determining whether an operation is industrial, the department has evaluated the capital investment of the operation, plant size, inventory maintenance and degree of mechanization, indicia which were implicitly validated by the court in Department of Taxation v. Orange-Madison Cooperative Farm Service, 220 Va. 655, 261 S.E. 2d 532 (1980). In the instant case, the technology and engineering involved in the production of the product are advanced; however, ******** operation itself employs a small number of employees, has a small plant, no mechanized product assembly line, and very limited finished product inventory. Thus, we cannot hold that ********* is an industrial manufacturer as such term is intended for purposes of the sales and use tax exemption.
We would further note that it is not the intent of the department to penalize small businessmen by denying them the industrial manufacturing exemption. However, the term "industrial" as it is used in Virginia Code § 58-441.6 must be given considerable weight. Had the law intended to exempt all persons engaged in manufacturing, regardless of the nature of the operation, the term "industrial" would be superfluous. Instead, the term industrial limits the exemption.
Therefore, based upon the foregoing, I find no basis for granting relief from the assessment.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner