Tax Type
Retail Sales and Use Tax
Description
Machinery, tools, supplies etc.
Topic
Exemptions
Date Issued
06-15-1982
June 15, 1982
Re: § 58-1118 Application/Use Tax
Dear ******************
This will reply to your letter of February 18, 1982 in which you apply for correction of use tax assessed against your client, *************** as the result of a recent audit.
Facts
************ (hereinafter ********* ) is engaged in the production of custom signs. In most instances will survey the job site, design the sign which would be best suited to the business and site, and submit the design concept to the customer for approval.
Once customer approval is secured, the sign is produced as a custom order. This process involves the formation of a mold for the sign, the baking of this mold, hand-painting and lettering of the sign, and the packing of the sign for shipment. The process is performed by hand. No inventory of completed products is maintained and materials are purchased on a per job basis. ********* employs approximately seventy employees who construct signs in two small buildings located across the street from one another.
********** contends that they are manufacturing a product for sale, and are thus entitled to the sales and use tax exemption for machinery, tools, supplies etc. under § 58-441.6 of the Code of Virginia.
Determination
The exemption for machinery, tools, supplies and similar items under Virginia Code § 58-441.6 is restricted to persons engaged in manufacturing, processing, mining, refining or reprocessing a product for sale or resale. The Department has consistently interpreted this exemption as applying only to persons manufacturing, processing, etc. in the industrial sense. This interpretation has been upheld, implicitly or explicitly, by the Virginia Supreme Court in Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973) and Commonwealth v. Orange Madison Coop Farm Service, 220
Va. 653, 261 S.E. 2d 532 (1980). Thus, in order to qualify for exemption under § 58-441.6, an operation must meet two tests. First, it must be manufacturing, processing, etc. a product for sale or resale; and, second, it must be manufacturing or processing in the industrial sense.
Any person who makes and sells a finished product is fabricating tangible personal property. Assuming that the operation is also industrial in nature, the exemption under § 58-441.6 would apply. We do not contend that ******** is not fabricating signs, but rather that the operation is not industrial.
The Department has consistently looked to five indicators in determining whether an operation is "industrial": size of inventory, size of plant, amount of investment, number of employees, and degree of mechanization. (See Orange-Madison, supra.) No quantitative parameters have been placed on these indicia.
In the instant case, ********* performs a manual process and therefore displays no degree of mechanization. Similarly, inasmuch as signs are constructed on a custom basis, there is little or no inventory of finished products. Relative to industrial manufacturers, the plant size is not large. Presuming that all indicia are equally weighted, ******* does not qualify as industrial. However, the existence or lack of a mechanized assembly or production line has proven to be the most significant criterion for evaluating "industrial." Absent such a production line, it is doubtful that an operation can qualify as industrial. Therefore, I find no basis for granting relief from the sales and use tax assessed against your client and I agree that the operation is properly classified as nonindustrial fabrication. We are unaware of any written correspondence in which ******** has previously been advised that the tax applies in any manner other than that set forth herein.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner