Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Recording producer
Topic
Taxability of Persons and Transactions
Date Issued
06-25-1997
June 25,1997
Re: § 58.1-1821 Application Reconsideration: Retail Sales and Use Tax
Dear*****************
This is in response to the April 23,1997, meeting with members of my staff in which you requested a reconsideration of my January 31, 1997, determination regarding the audit of******* (the "Taxpayer") for the period of June 1992 through May 1995.
FACTS
The Taxpayer is in the business of producing audio and video tapes. The Taxpayer is not involved in the directing, writing, or creative development of the audio or video tapes. The Taxpayer's process involves eight steps as follows: i) recording, ii) motion control, iii) film-to-tape and color correction, iv) video graphics and animation, v) mixing, vi) on-line and off-line editing, vii) captioning, and viii) audio and video tape duplication and conversion. The Taxpayer's products may undergo all, or any combination of the above activities. The Taxpayer was audited and assessed tax on all of the equipment used in the activities at the Taxpayer's ****** location. The Taxpayer feels they qualify as an industrial manufacturer based on the following two issues.
Standard Industrial Classification
The Taxpayer asserted in their original appeal that they were classified under industry group 3652 of the Standard Industrial Classification Manual. The department took the position that the Taxpayer did not operate as an "establishment primarily engaged in manufacturing phonographic records and prerecorded audio tapes and disks" as defined under industry group 3652, nor was the Taxpayer's operation industrial in nature. In the alternative, the Taxpayer is of the opinion that under the North American Industry Classification System (NAIC System), which will replace the 1987 Standard Industrial Classification Manual, the Taxpayer's operation would be classified under industry code 512, a category the Taxpayer feels would clearly afford the industrial manufacturing exemption.
Industrial Development Bond Issue
In an effort to obtain financing, the Taxpayer and a third party (hereinafter "joint venture"), sought approval from the******* Board of Supervisors for the issuance of industrial development bonds. In 1995, the******** Board of Supervisors passed a resolution for the issuance development bonds on behalf of the joint venture. The Taxpayer takes the position that the joint venture's operation will be identical to the Taxpayer's*********** operation. It is the Taxpayer's contention the approval of the industrial development bond issuance for the joint venture constitutes proof the Taxpayer's operation is manufacturing in nature. This would indicate that the *****facility was also a manufacturing facility.
The Taxpayer is requesting that they be afforded the sales and use tax exemption set forth under Code of Virginia § 58.1-609.3(2) and that the audit be adjusted accordingly.
DETERMINATION
Standard Industrial Classification
As provided in my determination letter of January 31,1997, Code of Virginia § 58.1-609.3(2) provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies used directly in... manufacturing... products for sale or resale." Title 23 of the Virginia Administrative Code (VAC) 10-210-920.B(1) defines "industrial manufacturers and industrial processors" to include "establishments engaged in the mechanical or chemical transformation of materials or substances into new products." This regulation goes on to further define "industrial manufacturers" as follows:
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- These establishments (hereinafter referred to "industrial manufactures") are usually described as plants, factories or mills and characteristically use power driven machines and material handling equipment. The production activities of such establishments are usually carried on for the wholesale market or to order for industrial users, rather than for direct sale to domestic consumers. The term "industrial manufacturer" as used herein shall include but not be limited to businesses classified similar to other businesses classified in codes 20 through 39 of the Standard Industrial Classification (hereinafter "SIC") Manual published by the U.S. Department of Commerce.
The Taxpayer takes the position that the department should not consider the SIC classification a dispositive component in this determination as the Office of Management and Budget (OMB) intends to replace the SIC Manual with the NAIC System. After a review of industry code 512 of the NAIC System, the department would classify the majority of the industry sectors as non-industrial in nature. Based on the above, and the opinion of the Virginia Supreme Court 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), I cannot conclude that the Taxpayer's production activities are industrial in nature.
Industrial Development Bond Issue
The provisions of the Industrial Development and Revenue Bond Act are provided under Code of Virginia Title 15.1, Chapter 33. The purpose of this Act is to establish Industrial Development Authorities in certain municipalities of the Commonwealth for the purpose of promoting industry and to develop trade by inducing manufacturing, industrial, governmental and commercial enterprises and institutions of higher education to locate in or remain in the Commonwealth. In order to achieve this purpose, the Authorities have the power to issue bonds to finance such endeavors. The issuance of bonds was not intended to define or distinguish business classification's for tax purposes or to establish industrial classifications.
Based on the above, the department does not feel that the approval of an industrial development bond issuance has any affect on the application of state taxes or the classification of enterprises for which those bonds help finance. For this reason, the department finds that the Taxpayer's *********operation does not qualify as an industrial manufacturer for sales and use tax purposes.
If you should have any questions, please contact ********Office of Tax Policy, at*********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12159K
Rulings of the Tax Commissioner