Tax Type
Retail Sales and Use Tax
Description
Sale to industrial manufacturers
Topic
Exemptions
Date Issued
10-07-1982
October 7, 1982
Re: Request for Ruling/Sales and Use Tax
Dear **************
This letter will reply to your correspondence of August 26, 1982 and reference the September 21 visit to your plant by department staff for the purpose of issuing a ruling on the sales and use tax status of the *********************.
FACTS
The ****************** manufactures a variety of plastic, corrosion resistant products for sale to industrial manufacturers. The items, with the exception of cell headboards, are produced on a custom basis pursuant to the customer's particular needs. The plant consists of 12,000 square feet of manufacturing space and 1,500 square feet of office space. ********** employs 3 salaried and 13 wage personnel, had annual sales of approximately $ ************ , and capital investment in machinery and tools of approximately $ ****** To the extent that most items are custom manufactured, no finished product inventory is maintained, except that some inventory of cell headboards is retained. The components of the finished product are generally produced at several work stations, and the final product is assembled at one work station. Components are moved through the plant via forklift trucks since the light weight of the materials does not require a more substantial means of transport.
DETERMINATION
Virginia Code § 58-441.6 provides an exemption from the sales and use tax for raw materials, machinery and tools and repair parts therefor, fuel, power, energy and supplies used directly in manufacturing or processing in the industrial sense. (Note: The application of the term "industrial" to modify the entire exemption was set forth by the Virginia Supreme Court in Golden Skillet Corp. v. Commonwealth, 214 Va 276, 199 S. E. 2d 511 (1973).) Thus, in order to qualify for exemption, an operation must meet two tests - they must be manufacturing or processing for sale or resale and they must be doing so in the industrial sense.
In order to determine whether a manufacturer or processor meets the "industrial test", the department has looked to several criteria which have been implicitly validated by the Virginia Supreme Court in Department of Taxation v. Orange-Madison Coop. Farm Serv. 220 Va. 655, 261 S. E. 2d 532 (1980). Specifically, the determinants of industrial are plant size, capital investment, number of employees, existence of a highly mechanized assembly line, and the existence of a finished product inventory.
After reviewing your operation, we do not dispute the fact that you are in fact manufacturing products for sale. However, we cannot hold that you are manufacturing in the industrial sense. The absence of a highly mechanized process and a finished product inventory as well as a relatively low capital investment and a small number of employees indicate a non-industrial manufacturing operation for purposes of the sales and use tax exemption.
We would note that there is no attempt to discriminate against small businesses with respect to this exemption. However, it is a well established judicial principle in Virginia that tax exemption statutes must be strictly construed against the taxpayer. Therefore, a strict construction must be placed upon the term "industrial". If any doubt exists with respect to a manufacturer's status as industrial, the rules of statutory construction require that the exemption be denied.
Therefore, based upon the foregoing I must hold that the ************* is not an industrial manufacturer within the provisions of Virginia Code § 58-441.6, and the exemption set forth within that section is not applicable to your business. However, I should note that this ruling does not abrogate the exemption available to you on the purchase of raw materials, packaging materials, or any other item which becomes a component part of the product for sale or resale.
Sincerely,
W. F. Forst
State Tax Commissioner
Rulings of the Tax Commissioner