My cold storage business freezes and chills customers' food products before shipping them out -- does my refrigeration equipment qualify for Virginia's industrial manufacturing and processing sales tax exemption?

Plain-English summary

A cold storage provider with a Virginia facility asked Virginia whether new refrigeration equipment it planned to purchase -- an industrial ammonia refrigeration system (compressors, evaporators, pumps, and related components) and a racking system for pallet storage -- would qualify for the sales and use tax exemption for machinery used directly in manufacturing or industrial processing. The company receives fresh meat products from customers, reduces them to freezing or near-freezing temperatures, and holds them at that temperature until shipped out; roughly 90% of incoming product arrives at about 45 degrees and is then either hard-frozen or chilled just above freezing at the facility.

Virginia Code § 58.1-609.3(2)(iii) exempts machinery used directly in "processing, manufacturing, refining, mining or converting products for sale or resale" -- but Virginia courts have long limited this exemption to processing that is industrial in nature, and Virginia Code § 58.1-602 ties "industrial in nature" to a business's own classification under the federal SIC (now NAICS) system. Businesses classified in manufacturing-type codes qualify; businesses classified elsewhere generally don't, regardless of what individual activities they perform.

Freezing or chilling food has been treated as industrial processing in cases from other states, and the NAICS food-manufacturing group covers freezing and preservation processes that begin with raw vegetable or animal inputs. But merely maintaining an ALREADY-frozen product in its frozen state is not processing -- and that distinction matched the NAICS classification for Refrigerated Warehouse and Storage (493120), covering businesses that operate refrigerated storage facilities, including blast freezing and tempering services, but that are not classified as manufacturing.

On the facts here, the company's products spent an average of 39 days in storage, versus being hard-frozen within 72 hours of arrival -- a big gap suggesting the predominant activity was storage, not processing. Sample revenue breakdowns backed this up: storage and handling fees were consistently higher than freezing fees for each customer. Virginia concluded the company's predominant business activity fit the Refrigerated Warehouse and Storage classification, not a manufacturing/processing one, so the equipment didn't qualify.

Separately, Virginia noted a second, independent problem: the exemption requires processing products for sale or resale, and this company doesn't sell or resell the meat products at all -- it charges its customers a service fee to chill, freeze, and store products the customers already own. That makes the company the user/consumer of its own equipment (subject to use tax on it), performing a service rather than manufacturing goods to sell.

What this means for you

Cold storage, warehousing, or logistics businesses considering the manufacturing exemption

Check your own NAICS/SIC classification first. If your predominant business activity (measured by things like average time products spend with you, and where your revenue actually comes from -- storage/handling fees versus processing fees) fits a storage or warehousing classification rather than a manufacturing one, equipment used in that activity won't qualify for the industrial processing exemption, even if some processing (like blast freezing) happens on-site.

Any business that processes goods but doesn't sell them

The manufacturing/processing exemption requires that you be processing products for YOUR OWN sale or resale. If you're instead performing a processing-adjacent SERVICE for customers who own the goods themselves (chilling, freezing, packaging, etc., billed as a service fee), you're the user/consumer of your equipment and owe use tax on it -- the exemption doesn't reach service providers regardless of how industrial their equipment looks.

Businesses weighing time-in-facility and revenue mix as evidence

Keep in mind Virginia will look at objective operational data -- how long products actually stay with you relative to how quickly true processing (like hard-freezing) happens, and how your revenue breaks down between processing-type fees and storage-type fees -- as evidence of your predominant activity, not just how you describe the business.

Common questions

Q: Does freezing or chilling food ever qualify as industrial processing in Virginia?
A: It can, if the business's predominant activity is properly classified as manufacturing/processing (not storage) under NAICS/SIC and it processes products for its own sale or resale -- but merely keeping an already-frozen product frozen is not processing.

Q: What tipped this ruling toward "storage" rather than "processing"?
A: Products spent an average of 39 days in the facility versus being hard-frozen within 72 hours of arrival, and storage/handling fees consistently exceeded freezing fees in the company's own revenue data -- both signaling the predominant activity was refrigerated storage.

Q: Even if a business is industrial in nature, is that enough to qualify?
A: No. The exemption also requires that the business be processing the products for its OWN sale or resale. A company that charges customers a service fee to process goods the customers already own doesn't meet that requirement, even with qualifying equipment.

Citations and references

• Va. Code § 58.1-609.3(2)(iii) (exemption for machinery/tools used directly in manufacturing, processing, refining, mining, or converting products for sale or resale)
• Va. Code § 58.1-602 (statutory definition tying "industrial in nature" to SIC/NAICS classification)
• 23 VAC 10-210-920(A) (exemption requires manufacturing or processing products for sale or resale that is industrial in nature)
• 23 VAC 10-210-4040(E) (a service provider is the user/consumer of tangible personal property used in performing its services, subject to use tax)
• Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973) (exemption available only to processors of products for sale or resale in the industrial sense)
• Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980) (not all processing qualifies -- limited to processing that is industrial in nature)
• Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973) (sales and use tax exemptions are strictly construed)

Subject

Exemption : Manufacturing - Industrial Processing by a Cold Storage Business, Sales : Products for Sale or Resale/Services Provided to Customers

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-152-0

Original ruling text

December 14, 2021

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on behalf of * (the “Taxpayer”) concerning the retail sales and use tax exemption for industrial manufacturers or processors. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a cold storage provider with a facility in Virginia, receives fresh meat products from customers, reduces the temperature of the product to freezing or near-freezing temperatures and maintains those temperatures until the product is shipped from the facility. The Taxpayer explains that approximately 90% of the products that are anticipated to be received at the facility will arrive at approximately 45 degrees fahrenheit and then will be either hard frozen at the facility or reduced in temperature to just above freezing.

The Taxpayer describes the machinery and equipment at issue as an industrial ammonia refrigeration system comprised of various refrigeration components including compressors, evaporators, vessels, pumps, heat exchanges, condensers and associated piping, controls and valves. This equipment will be purchased to refrigerate a facility expansion space which includes an industrial freezer zone and a cooled loading dock. In addition, certain improvements and modifications will be made to the refrigeration system in the existing facility so it can support the expansion. None of the equipment at issue, however, will be used to provide temperature control to anywhere other than the industrial freezer and cooling zones and cooled loading dock. Other areas of the facility such as offices, restrooms, break rooms and other common areas are controlled by an ancillary heating and cooling system.

The equipment at issue also includes a racking system. The racking equipment creates space around the sides of every pallet and protects stacked products from destruction. Industry standards require a certain spacing minimum between product containers so as to ensure proper cooling, including proper removal of heat created by microbial processes that naturally occur within the product. The Taxpayer requests a ruling regarding whether its purchases of the equipment described above will qualify for the manufacturing and processing exemption pursuant to Virginia Code § 58.1-609.3 2 iii.

RULING

Industrial Manufacturing and Processing Exemption

Virginia Code § 58.1-609.3 2 iii provides an exemption from the retail sales and use tax for “machinery or tools or repair parts therefor or replacements thereof . . . used directly, in processing, manufacturing, refining, mining or converting products for sale or resale . . . .” A number of Virginia court cases have interpreted this statute. There are two of noted significance in this instance. The Virginia Supreme Court in Golden Skillet Corporation v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1973) held that the exemption was available only for processors of products for sale or resale in the industrial sense. Additionally, the Virginia Supreme Court in Commonwealth v. Orange-Madison Cooperative , 220 Va. 655, 261 S.E.2d 532 (1980) opined that not all processing qualifies for the industrial manufacturing exemption because the exemption is limited to processing operations that are industrial in nature.

The opinions rendered in the cited court cases are reflected in the Department’s manufacturing and processing regulation. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 A states that for a business to obtain the exemption, it must be manufacturing or processing products for sale or resale. In accordance with the cited case law, such production must be industrial in nature. The Department’s reliance on business classifications for purposes of determining whether manufacturing and processing activities are considered industrial in nature is based on the statutory definition of manufacturing and processing in Virginia Code § 58.1-602. Included in this definition is an explanation of the term “industrial in nature.” As this term is defined, businesses are considered industrial in nature if classified in codes 10 through 14 and 20 through 39 in the SIC Manual for 1972 and in supplements issued thereafter. The SIC has since been replaced by the North American Industry Classification System (NAICS).

Both the SIC and NAICS assign industrial classifications according to the primary activity of the business. Unless the primary business activity is manufacturing or processing in accordance with these classifications, the Department would not consider the business to be eligible for the manufacturing and processing exemption.

Although it appears to be an issue of first impression in Virginia, the freezing or chilling of food has been considered industrial processing in cases from other states. See, e.g ., Fischer Artificial Ice & Cold Storage Company vs. Iowa State Tax Commissioner , 81 N.W.2d 437 (Iowa 1957) and Hudson Foods vs. Director of Revenue, 924 S.W.2d 277 (Mo. 1996). In addition, NAICS industry group 3114 include establishments that freeze food and those that use preservation processes, such as pickling, canning or dehydrating, both of which begin their production process with inputs of vegetable or animal origin. The categorization of such businesses as manufacturing by the NAICS is consistent with the case law.

It has been held, however, that merely maintaining an already frozen product in its frozen state does not constitute processing. See Wetterau, Inc. v. Director of Revenue, 843 S.W.2d 365 (Mo. 1992). This is also consistent with the NAICS classification 493120, Refrigerated Warehouse and Storage. This industry comprises establishments primarily engaged in operating refrigerated warehousing and storage facilities. The services provided by these establishments include blast freezing, tempering, and modified atmosphere storage services. This is not a manufacturing or processing business classification.

In the Department’s opinion, the information provided supports the Taxpayer’s classification under NAICS classification 493120, Refrigerated Warehouse and Storage. Although the Taxpayer conducts freezing activities, including blast freezing activities, at its facility, it appears that the Taxpayer’s predominant activity is cold storage. Products that arrive at the facility must be hard frozen within 72 hours of arrival and then spend on average 39 days at the facility. This difference in time suggests that the predominant activity is cold storage. This inference is also supported by the sample revenue breakdowns provided by customer. In each case, storage and handling fees were higher than the freezing fees. Because the Taxpayer’s predominant business activity is not categorized under a manufacturing or processing business classification, the Taxpayer would not be able to claim the manufacturing and processing exemption for the equipment at issue.

Sale or Resale

Sales and use tax exemptions are strictly construed pursuant to the decision in Commonwealth v. Community Motor Bus Co., Inc ., 214 Va. 155, 198 S.E.2d 619 (1973). Virginia Code § 58.1-609.3.2 iii requires that the processing of products be for sale or resale. The regulation reflects the statute, explaining that “for a business to obtain the exemption, it first must be manufacturing or processing products for sale or resale.” See Title 23 VAC 10-210-920 A.

In this case, it appears that the Taxpayer charges for the chilling, freezing and storage of food products as services to its customers. As such, the Taxpayer is not itself processing products for sale or resale. Rather, it is performing services for its customers. As a service provider, the Taxpayer would be considered the user and consumer of tangible personal property provided in the provision of its services, and thus subject to the use tax on such property. See Title 23 VAC 10-210-4040 E.

CONCLUSION

In the Department’s opinion, the equipment at issue would not qualify for the manufacturing and processing exemption because the Taxpayer is primarily operating as a refrigerated warehouse and storage business, which is not by NAICS classification considered manufacturing or processing. In addition, the Taxpayer does not actually process any products for sale or resale. Rather, it charges customers for the services it performs for them.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulations cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1925.M