Current through Register Vol. 41, No. 3, September 23, 2024
A. Manufacturers
are not listed as a classification for which § 58.1-3706 of the Code of
Virginia specifies the maximum tax rate. The taxation of wholesalers, however,
is affected by whether the business is also classified as a manufacturer, and
whether activities at a definite place of business from which sales are made
are considered to be part of the manufacturing process. Questions also arise as
to whether a business is a manufacturer or properly classified as another type
of business.
B. The Code of
Virginia does not define the term "manufacturer" for purposes of the local
business license tax. The courts, however, have developed a liberally applied
test involving three essential elements in determining when a person is a
manufacturer:
1. The original
material;
2. A process whereby the
original material is changed; and
3. A resulting product which, by reason of
being subjected to processing, is different from the original material.
(See the Virginia Supreme Court's discussion in County of
Chesterfield v. BBC Brown Boveri, 238 Va. 64 (1989) of the term "manufacturer"
for purposes of the BPOL law.)
C. "Manufacturer" means one engaged in
activity that transforms materials into an article or product of substantially
different character. A business engaged in manufacturing does not lose its
status as a manufacturer merely because it conducts some nonmanufacturing
activities. When one is engaged in both manufacturing and nonmanufacturing
activities, it can still be classified as a manufacturer if its manufacturing
activity constitutes a substantial portion of its overall activities. The test
to determine whether a multipurpose business qualifies as a manufacturer for
tax purposes is one of substantiality. The test of substantiality has no rigid
definition; however, the business as a whole must be considered. In order for
the manufacturing component of a multipurpose business to be deemed
substantial, it must not be de minimis, merely trivial, or only incidental to
its principal business.
1. Gross receipts that
are ancillary to a manufacturer's sales at wholesale at the place of
manufacture are also exempt even though the receipts may be attributable to
activities at another location, e.g., interest on an installment sale or charge
account may be received at a location other than the place of manufacture and
sale at wholesale.
2. Mere
manipulation or rearrangement of the original materials is not sufficient;
there must be a substantial, well-signified transformation in form, usability,
quality and adaptability rendering the original material more valuable for use
than it was before. Merely processing, blending, grading, etc. material is not
manufacturing.
3. Not every person
engaged in some manufacturing is classified as a manufacturer. The
manufacturing component of the business must be a substantial (i.e., not
incidental or inconsequential) portion of the business. The factors that may be
considered in determining whether the manufacturing component of a multi
purpose business makes a substantial contribution to the entire business
include, but are not limited to, any one or more of the following:
a. The manufacturing component's financial
receipts or proportion of total corporate income;
b. The percentage that manufacturing
equipment, inventory, etc. comprises of the total capital investment;
c. The number of employees working in the
manufacturing component as compared with the total number of employees;
or
d. The ratio of manufacturing
activities to the entire business. For example, if a developer of very complex
custom software produces only a few copies of disks, the assembly of purchased
components may or may not constitute manufacturing. However, if such production
constitutes a majority of the business' activities, the business may be
considered a manufacturer.
4. Routine assembly generally is not
manufacturing. For example, if components are sold separately and assembly is
offered as an option to the purchaser, the assembly is a service (which may or
may not be ancillary to the sale of the component, or de minimis). When
evaluating the facts and circumstances to determine if a business is engaged in
manufacturing, factors that suggest that assembly is not a separate service but
part of a manufacturing process include, but are not limited to, any one or
more of the following:
a. The assembly process
is complex and uses numerous parts.
b. After assembly, the components cannot be
recognized without previous knowledge.
c. The components are not readily usable for
any purpose other than incorporation into the finished product.
5. Engineering, design, research
and development, and computer software development typically are not
manufacturing. However, the actual production of tangible products based on
engineering, design, research and development can be manufacturing. For
example:
a. While the development of computer
software is not manufacturing, the production of boxes containing the software
on disks and related instruction manuals may be manufacturing.
b. While the design of computer hardware
components is not manufacturing, the production of such components may be
manufacturing.
c. While the design
and engineering of specialized tools, dies, and machinery is not manufacturing,
the production of even a single tool, die or machine may be
manufacturing.
6.
Manufacturing examples:
a. An entity accepts
delivery of used and burnt up turbine powered generators that can no longer
properly function. The entity removes parts from the generators and replaces
them with new parts that it makes to precise specifications from raw copper.
The entity also rewinds the generators with new copper wiring. After repair,
the generators operate much like a new machine. For the reasons stated in this
section, this activity constitutes manufacturing.
b. An entity purchases livestock outside of
the state of Virginia, brings that stock into Virginia, and slaughters and
trims the stock here, and also smokes and salts the meat for sale in Virginia.
Under these facts, this activity constitutes manufacturing.
c. An entity receives from various vendors
electro magnetic tape, some in raw form and some in programmed format, and
integrates the data thereon with other magnetic tape received from other
vendors that will result in a customized home video game cartridge or diskette.
Based upon these facts and for the reasons stated in this section, this
activity does not constitute manufacturing.
d. Same as subdivision 6 c, except the entity
designs small plastic, box like cartridges and, after integrating the various
original data types into combined data on a previously blank magnetic tape
medium, it electronically engrafts the new, combined data onto magnetic plate
like tape diskettes inside of the cartridges and ships the resulting cartridges
for wholesale from its production facility in Virginia. For the reasons stated
in this section, this activity as outlined in these set of facts constitutes
manufacturing.
e. An entity engages
in typesetting, duplicating, editing or graphic design processes. These
activities by themselves are neither printing nor manufacturing. However, when
an entity engages in more than one or a combination of these processes to
produce a product that is substantially transformed from the original material,
it may qualify as a manufacturer. If the entity sells the new product at
wholesale from the place of manufacture, the business may benefit from the
exemption contained within § 58.1-3703C 4 of the Code of
Virginia.
§ 58.1-3701 of the Code of
Virginia.
