Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Film processing
Topic
Taxability of Persons and Transactions
Date Issued
11-28-1994
November 28, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear******************
This will reply to your letter concerning your client, *********(the "Taxpayer") and the sales and use tax assessment for the period September 1, 1989 through August 31, 1992.
FACTS
The Taxpayer operates a camera store in a retail shopping center, makes retail sales, rentals, and repair of camera and video equipment, and sells photographic supplies. In addition, the Taxpayer develops film on the premises of the camera store for its customers. Approximately fourteen (14) percent of total sales is attributable to film processing. The remaining sales are attributable to the sale and repair of camera and video equipment and the sale of photographic supplies. The Taxpayer contends that the film processing equipment and supplies are used directly in manufacturing activities; therefore, the purchase of these items is exempt from the tax under Code of Virginia § 58.1-609.3(2).
DETERMINATION
On February 4, 1993, the Circuit Court of Fairfax County, Virginia issued its decision in Ritz Camera Centers. Inc. v. Department of Taxation at Law No. 112550 holding that a particular photo processing operation was industrial in nature and not incidental to the camera store business. As a result, the dealer's purchases of tangible personal property used directly in the photo processing operation were exempted from the tax under the manufacturing and processing exemption provided in Code of Virginia § 58.1-609.3(2).
The court's decision was based on the facts presented in the Ritz case and not the validity of the department's policy as set forth in Virginia Regulation (VR) 630-10-63, Manufacturing and Processing. Therefore, the department will continue to apply the regulation on a case-by-case basis, examining the facts and circumstances applicable to each affected business.
The Virginia Supreme Court addressed the manufacturing and processing exemption in Golden Skillet v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973) and Commonwealth v. Orange-Madison. 220 Va. 655, 261 S.E.2d 532 (1980) by indicating that the exemption is available only to true manufacturers or industries. Further, the exemption applies to machinery, tools, and supplies used in the manufacturing or processing of products for sale or resale only in the industrial sense.
In Orange-Madison. the court determined that the processing activities of business, which processed feed and fertilizer primarily for sale to farmers in agricultural production, were industrial in nature; and therefore, qualified for the industrial manufacturing exemption. However, the court determined in Golden Skillet that the restaurants which prepared fried chicken for sale at retail were not industrial operations and were not entitled to the industrial manufacturing exemption. Likewise, under VR 630-10-63(B):
-
- Establishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in non-industrial activities. Establishments of this type include retailers such as restaurants, caterers, meat and fish markets, and candy, nut and confectionery stores which process food products primarily for direct sale on the premises to consumers. Such non-industrial establishments also include individuals engaged primarily in providing personal services such as photographers, artist, tailors, and seamstresses. (Emphasis added.)
- Establishments which manufacture or process tangible personal property as an incidental part of a retail or service business are generally deemed to be engaged in non-industrial activities. Establishments of this type include retailers such as restaurants, caterers, meat and fish markets, and candy, nut and confectionery stores which process food products primarily for direct sale on the premises to consumers. Such non-industrial establishments also include individuals engaged primarily in providing personal services such as photographers, artist, tailors, and seamstresses. (Emphasis added.)
In determining whether manufacturing or processing activities are an incidental part of the retail or service business, the department considers the primary purpose of the retail business. Manufacturing and processing activities may be necessary to the retail operations and yet still be considered incidental.
In this case, there are indicia that indicate that the film processing conducted by the Taxpayer is purely secondary to the operation of the retail business. First, the operation is a part of a retail store located in a shopping center open to the general public. Second, the Taxpayer's camera shop sells camera equipment and supplies.
Third, in the Taxpayer's case, only 14% of the Taxpayer's gross receipts are attributable to film processing activities.
-
- Additionally, as provided in Code of Virginia §58.1-602:
"[I]ndustrial 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.
- Additionally, as provided in Code of Virginia §58.1-602:
Based on the information we have received to date, the Taxpayer is deemed a non-industrial retail business with manufacturing/processing activities incidental to the retail business. Accordingly, the purchase of equipment and supplies to be used in the development of film does not qualify for the industrial manufacturing and processing exemption. However, if the Taxpayer can provide additional information which demonstrates that the industrial manufacturing exemption applies to their operations, the assessment will be revised. Although not all-inclusive, some additional factors the department may consider in making a determination regarding the status of the retail business are:
- number of transactions attributable to each aspect of the business;
- where each activity occurs;
- the size of the operation and percentage of floor space attributable to each aspect of the business; and
- percentage of business activity attributable to each activity.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7062N
Rulings of the Tax Commissioner