Tax Type
Retail Sales and Use Tax
Description
Product packaging; Industrial processing
Topic
Exemptions
Date Issued
06-02-1987
June 2, 1987
Re: Request for Ruling/Sales and Use Tax
Dear *********************
This will reply to your letter of April 24, 1987, in which you request a ruling on the application of the industrial processing exemption to ***********************.
FACTS
************* ("Taxpayer") is engaged in the packaging of goods produced by manufacturers for sale or resale. Primarily, the taxpayer's customers are manufacturers or processors of food products, pharmaceuticals, and cosmetics. Typically, a manufacturer or processor will ship bulk quantities of products to the taxpayer, which are in turn packaged and delivered back to the manufacturer or processor in a form suitable for retail sale.
Depending on the nature of the product to be packaged, the taxpayer may design and itself produce the packaging material (for instance, foil pouches or plastic containers). In other instances, the taxpayer may order ready made packaging materials from suppliers. In connection with the packaging of products, the taxpayer often is required to blend or mix components provided by a manufacturer in order to produce the manufacturer's final saleable product.
The taxpayer requests a ruling on the applicability of the industrial manufacturing and processing exemptions to its packaging business.
RULING
§58.1-608.1 of the Code of Virginia provides exemptions from the sales and use tax for machinery, tools, and other tangible personal property used directly in the manufacturing or processing of products for sale or resale. However, as noted by the Virginia Supreme Court in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973), the statute "is intended... to provide exemption for machinery and tools used in processing (or) manufacturing...products for sale or resale only in the industrial sense.
§58.1-602.9 of the Code of Virginia provides that those businesses listed in codes 10-14 and 20-39 of the Standard Industrial Classification (SIC) Manual will be deemed to be among those that are industrial in nature. In addition, the Virginia Supreme Court in Commonwealth v. Orange-Madison, 220 Va. 655, 261 S.E.2d 532 (1980), opined that in order for processing to occur a product need only "undergo a treatment rendering the product more marketable or useful," provided of course that the processing is industrial in nature.
Based on these criteria, it is evident that in many respects the taxpayer is a manufacturer or processor of products in the industrial sense. For instance, when the taxpayer produces its own packaging materials for sale or resale, it is engaged as an industrial manufacturer (see codes 24, 26, 30, and 32 of the SIC Manual, which include the production of wooden, paper, glass, and plastic containers). Furthermore, the taxpayer is an industrial processor under the Orange-Madison test when it mixes or blends components provided by a manufacturer to produce the manufacturer's final product.
In general, however, the taxpayer's entire packaging process qualifies for the industrial exemption inasmuch as the products provided by manufacturers undergo a treatment that renders them substantially more marketable. In the loose state that the taxpayer receives food products, pharmaceuticals, cosmetics, and other products, their marketability is limited. However, the taxpayer's sorting, measuring, and packaging-of the loose goods into bottles, foil pouches, jars, boxes, cartons, etc., enables the products to ultimately be placed on the market for retail sale.
Accordingly, machinery, tools, supplies, and other tangible personal property used by the taxpayer in the packaging of goods for sale or resale are not subject to the sales and use tax.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner