Tax Type
Retail Sales and Use Tax
Description
Packaging of surgical supplies; Industrial processing defined
Topic
Taxability of Persons and Transactions
Date Issued
10-15-1985
October 15, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of July 11, 1985 in which you submit an application for correction of sales and use tax assessed to ***** as the result of recent audits.
FACTS
The taxpayers are engaged in the procurement of surgical supplies, the assemblage of such supplies on special trays, and the sterilization and packaging of such trays for sale to hospitals and other customers. Recent audits of the taxpayers produced assessments for their failure to remit the sales and use tax on certain items of tangible personal property used in assembling its products for sale.
The taxpayers contest these assessments, contending that they are industrial manufacturers entitled to the exemptions set forth in Section 58.1-6O8.1 of the Code of Virginia.
DETERMINATION
Section 58.1-6O8.1 of the Code of Virginia provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, (or) manufacturing...products for sale or resale."
"Manufacturing" generally entails the "transformation of a raw material into an article of substantially different character," Commonwealth v. Orange-Madison, 220 Va. 655, 261 S E.2d 532 (198O), but "processing" only requires "that the product undergo a treatment rendering the product more marketable or useful," Orange-Madison, 22O Va. at 658 Under the above definitions, the taxpayers cannot be classified as manufacturers as they do not transform raw materials into substantially different articles; however they are engaged In processing as the surgical supplies they assemble undergo a sterilization process rendering the supplies more marketable.
The fact that the taxpayers are engaged in processing alone does not render their processing machinery, tools, supplies, etc. exempt from the tax. In interpreting the provisions of Virginia Code Section 58-441.6, the predecessor to Virginia Code Section 58.1-6O8.1 the Virginia Supreme Court determined in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), that the statute was intended "to provide exemption for machinery and tools used in...processing... products for sale or resale only in the industrial sense_
Virginia Code Section 58.1-6O2.9 provides the following guidance in determining whether a business is industrial in nature:-
- The determination whether any...processing...activity is industrial in nature shall be made without regard to plant size, existence or size of finished product inventory, degree of mechanization, amount of capital investment, number of employees or other factors relating principally to the size of the business. Further, "industrial in nature" shall include, but not be limited to, those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification Manual for 1972 and any supplements issued thereafter.
A review of the Standard Industrial Classification Manual reveals no mention of the type of business conducted by the taxpayers in Codes 10-14 or 20-39 of the Standard Industrial Classification Manual. As noted by the taxpayers, this fact alone does not necessarily exclude them from the industrial exemption. Accordingly, we must look for guidance to the court's opinions in Golden Skillet, supra and Orange-Madison, supra.
In Golden Skillet, the court held that "the process of preparing and frying chicken at retail...is not an industrial operation," 214 at 279. Expounding on its Golden Skillet opinion, the court stated that the exemption was intended to apply only to true...industries, and not to retailers such as restaurants," 22O Va. at 659, as the "processing done by a restaurant is ancillary to the service provided by the restaurant," 220 Va. at 659.
Here I find the processing performed by the taxpayers to be analogous to the processing at issue in Golden Skillet, supra. Like a fast-food retailer, the processing performed by the taxpayers is purely ancillary to the service provided by them, the sale of surgical supplies based upon customer specifications. Thus, the industrial processing exemption is not available to the taxpayers.
Based upon the foregoing, I find no basis for granting relief from the assessments outstanding against the taxpayers.
Sincerely
W. H. Forst
Tax Commissioner-
Rulings of the Tax Commissioner