My business cuts and finishes stone slabs into custom countertops -- does that count as 'manufacturing' for local business license and equipment tax purposes, even though the finished product is still recognizably stone?

Plain-English summary

This ruling is a taxpayer win on a recurring question for fabricators and custom manufacturers: does a finished product that's still recognizably made from the same raw material (here, a stone countertop that's still obviously granite or marble) count as "manufacturing," or is it just processing?

A countertop fabricator transformed raw slabs of granite and marble into finished countertops through a multi-step process: trimming to job specifications, cutting mitered edges and gluing them, cutting sink and faucet openings, grinding decorative edges, and buffing, polishing, and sealing the surface. The county audited the business, determined it was not a manufacturer, reclassified it as a retailer/wholesaler for BPOL purposes, and assessed both BPOL tax and regular business tangible personal property (BTPP) tax on its fabricating equipment.

The Department disagreed. Virginia's courts use a three-part test for manufacturing: (1) original (raw) material, (2) a process that changes that material, and (3) a resulting product that's different from the original because of that processing. The county argued that because the finished countertop was still obviously granite or marble, there was no "substantial transformation." The Department rejected that reasoning -- the same argument would defeat manufacturing status for a picture frame still recognizably made of the same wood, metal, and glass, which the Department has already found to be manufacturing. What matters is that the complex, multi-step cutting and finishing process made the slab into a different, more valuable, and non-reversible product (a finished countertop that can't be used as anything else).

Because it's a manufacturer, the business owes no BPOL tax on countertops it sells wholesale to contractors, designers, and builders who resell them to homeowners -- but its direct retail sales to homeowners are still taxable, since the manufacturing exemption only covers the specific privilege of selling at wholesale from the place of manufacture, not a blanket exemption from BPOL tax. And its fabricating equipment is taxed under Virginia's separate machinery and tools (M&T) tax, a state-created classification for manufacturing equipment, rather than under the regular BTPP tax that applies to non-manufacturers' equipment.

What this means for you

Fabricators, custom shops, and other processors of raw materials

Don't assume that a finished product being "recognizable" as the same underlying material (stone, wood, metal, fabric) defeats manufacturer status. The legal test asks whether the process substantially transformed the material into something different and more valuable in form, usability, or adaptability -- not whether an observer can still tell what it started as.

Businesses that sell both wholesale and directly to consumers

Manufacturer status under Va. Code § 58.1-3703 C 4 only exempts wholesale sales made at the place of manufacture. If you also sell directly to end consumers (here, homeowners), those retail sales remain subject to BPOL tax even though your wholesale sales to resellers are exempt.

Accountants advising manufacturing or fabrication businesses

If manufacturer status is confirmed, remember the two-tax consequence: BPOL exemption for qualifying wholesale sales, plus a shift from the regular business tangible personal property tax to the separate machinery and tools tax on equipment actually used in the manufacturing process (equipment not used in manufacturing stays subject to regular BTPP tax).

Common questions

Q: Does a finished product have to be unrecognizable from its raw material to count as "manufactured"?
A: No. The Department has repeatedly rejected that argument -- a finished product (like a picture frame or a countertop) can still be visibly made from the same wood, metal, glass, or stone and still qualify, as long as the process substantially transformed the material's form, usability, or value.

Q: If my business is a manufacturer, does that exempt all of my sales from BPOL tax?
A: No. It only exempts sales at wholesale made at the place of manufacture. Direct retail sales to end consumers remain taxable.

Q: How is a manufacturer's equipment taxed differently from other businesses' equipment?
A: Machinery and tools used directly in the manufacturing process are taxed under Virginia's separate machinery and tools (M&T) tax classification rather than the regular business tangible personal property tax; equipment not used in manufacturing remains subject to the regular BTPP tax.

Citations and references

• Va. Code § 58.1-3703 C 4 (localities cannot impose a license tax on a manufacturer's wholesale sales at the place of manufacture)
• Va. Code § 58.1-3703.1 A 5; § 58.1-3983.1 D 1 (Department authority to decide BPOL and BTPP appeals; local assessments are prima facie correct)
• Va. Code § 58.1-1101 A 2 (manufacturing capital is classified as intangible property, taxed only by the state)
• Va. Code § 58.1-3507 A (machinery and tools used in manufacturing are a separate class of tangible personal property, taxed only locally)
• Title 23 VAC 10-500-520 (three-element manufacturing test; factors distinguishing manufacturing from mere assembly)
• Title 23 VAC 10-500-350; Title 23 VAC 10-500-10 (wholesale sale vs. retail sale defined)
• County of Chesterfield v. BBC Brown Boveri, 238 Va. 64, 380 S.E.2d 890 (1989) (source of the three-element manufacturing test)
• P.D. 09-94 (6/11/2009) (cutting wood, metal, and glass into picture frames is manufacturing); P.D. 97-146 (3/27/1997), P.D. 98-154 (10/16/1998), P.D. 18-164 (9/26/2018) (manufacturers selling at retail are taxable on those retail sales); P.D. 21-62 (5/18/2021) (prior remand of this same case for a proper local determination)

Subject

BPOL : Classification - Manufacturer - Assembly; Property : Tangible : Machinery and Tools - Manufacturer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-42

Original ruling text

March 15, 2022

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License (BPOL) Tax

Business Tangible Personal Property (BTPP) Tax

Machinery & Tools (M&T) Tax

Dear *:

This final state determination is issued upon the application for correction filed by * (the “Taxpayer”), with the Department of Taxation. The Taxpayer appeals the assessments of BPOL tax issued to the Taxpayer for the 2017 through 2019 tax years and the assessments of BTPP tax for the 2016 through 2019 tax years by *** (the “County”).

The local license tax and fee and business tangible personal property tax are imposed and administered by local officials. Virginia Code §§ 58.1-3703.1 A 5 and 58.1-3983.1 D 1 authorize the Department to issue determinations on taxpayer appeals of certain BPOL and BTPP tax assessments, respectively. On appeal, a tax assessment by a local assessing officer is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Taxpayer was a fabricator of countertops. It transformed slabs of raw granite and marble into finished countertops. The installation of the countertops was performed by unrelated third party contractors. The Taxpayer classified itself as a contractor for purposes of the BPOL tax. In addition, it did not remit BTPP tax on its fabricating equipment.

As the result of an audit, the County issued assessments of BTPP tax for the 2016 though 2019 tax years to the Taxpayer. The Taxpayer appealed the assessments to the County, contending that its equipment constituted machinery and tools used in manufacturing and should be taxed at the applicable Machinery and Tools (M&T) tax rate. The County requested additional information in order for it to determine whether the Taxpayer was a manufacturer for purposes of both the BTPP and BPOL taxes. Based on the documentation it received and a site visit, the County determined that the Taxpayer should be classified as a retailer in part and a wholesaler in part for purposes of the BPOL tax, and that it was not performing manufacturing. Accordingly, BPOL tax was assessed for the 2017 through 2019 tax years and the BTPP tax assessments were upheld. The Taxpayer appealed the assessments of BTPP and BPOL taxes to the Department, asserting that it should be classified as a manufacturer for purposes of the BPOL and BTPP taxes.

In Public Document (P.D.) 21-62 (5/18/2021), the Department remanded the case to the County to issue a proper final local determination. The Department also instructed the Taxpayer to amend its local appeal to include an appeal of its BPOL classification.

The County re-issued a final local determination letter in response to the Taxpayer’s amended appeal. It determined that the Taxpayer was not a manufacturer for purposes of the BPOL and BTPP taxes because it merely cut a slab to order and the finished product was still a slab of granite or marble. The Taxpayer appeals the assessments to the Department, asserting again that it should be classified as a manufacturer.

ANALYSIS

BPOL - Manufacturing

Virginia localities are prohibited from imposing a license fee or tax on a manufacturer for the privilege of manufacturing and selling goods, wares and merchandise at wholesale at the place of manufacture. See Virginia Code § 58.1-3703 C 4. The local business tax statutes do not define the term “manufacturer” for purposes of the local business license tax. However, the Supreme Court of Virginia (the “Court”) has developed a test involving three essential elements in determining whether a manufacturing activity is being undertaken. These elements are: (1) original material, referred to as raw material; (2) a process whereby the original material is changed; and (3) a resulting product, which by reason of being subject to such processing, is different from the original material. See Title 23 of the Virginia Administrative Code (VAC) 10-500-520 B and County of Chesterfield v. BBC Brown Boveri , 238 Va. 64, 380 S.E.2d 890 (1989). As such, for local business tax purposes, a manufacturer means one engaged in a processing activity whereby the original materials are transformed into a product that is substantially different in character from the original materials.

The process of fabricating a countertop began with multiple slabs of granite or marble that were trimmed down to approximate job specifications. Excess stone was cut off by a saw specifically designed for stone cutting. If a customer requested a mitered edge, two slabs were cut at 45 degree angles by the saw and glued to form a new edge. A power hand saw was then used to cut excess slab material left by the bridge saw. The hand saw also cut the part of the slab where a sink would be installed. A hole saw bit was used to cut holes in the sink countertop area where the faucet would be installed. A grinder or stone cutter was used to cut a decorative edge if a mitered edge was not selected. The countertop was then buffed and polished. Next, sealant was applied to protect the countertop from stains and spills. Finally, the finished countertops were quality checked to ensure they met the job specifications and the surfaces were free of color imperfections and scratches.

For purposes of the BPOL tax, Title 23 VAC 10-500-520 C provides that in order for manufacturing to occur, the:

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.

Further, this regulation provides factors used to help determine whether a process is manufacturing or assembly. Factors that suggest the production is manufacturing include, but are not limited to, whether: 1) the assembly process is complex and uses numerous parts; 2) after assembly, the components cannot be recognized without previous knowledge; and 3) the components are not readily usable for any purpose other than incorporating into the finished product.

In this case, the only components were the granite or marble slabs and the mounting studs. The process for transforming a slab into a finished countertop, however, was complex. It required cutting to precise measurements, creating edges, multi-step polishing and sealing. Once, the countertop was finished, it could not be used as anything other than a countertop.

The County asserts that no substantial transformation took place because the finished product was fundamentally a slab of granite or marble. The County essentially argues that the slab was still recognizable as a marble or granite slab after being fabricated into a countertop. In P.D. 09-94 (6/11/2009), the Department determined that cutting wood, metal and glass to specified lengths and combining these pieces to form picture frames satisfied the three part manufacturing test set out in BBC Brown Boveri . Clearly the wood, metal and glass in the finished picture frame could be recognized as the individual pieces of wood, metal and glass. In this case, the finished countertop would be recognized as originating from a slab of granite or marble. This recognition, however, does not change the fact that a substantial alteration occurred.

Wholesale Sales

In order to be classified as a manufacturer for BPOL tax purposes, it is not enough that the business be conducting substantial manufacturing activities. An entity must be selling goods, wares or merchandise at wholesale. As it is the public policy of Virginia to encourage manufacturing, the words “selling goods, wares and merchandise at wholesale” must be liberally interpreted.

Wholesale trade is generally recognized as the selling at such prices and in such quantities to others who will then resell such goods either to ultimate consumers or further down the normal distribution chain. See Title 23 VAC 10-500-350 A. Not all manufacturers sell at wholesale, however. For example, in P.D. 97-146 (3/27/1997), it was determined that manufacturers selling at retail are subject to license taxation on gross receipts from retail sales. See also P.D. 18-164 (9/26/2018). The underlying reasoning for these determinations resulted because Virginia Code § 58.1-3703 C 4 only exempts a specific privilege undertaken by a manufacturer and does not provide a blanket exemption for manufacturers. See P.D. 98-154 (10/16/1998).

Under Title 23 VAC 10-500-10, a “retail sale” is defined as “a sale of goods, wares and merchandise for use or consumption by the purchaser or for any purpose other than resale by the purchaser, but does not include sales at wholesale to institutional, commercial, industrial, and governmental users that are classified as wholesale sales.” While no single factor, such as price, purpose, or place, can always distinguish between wholesale and other types of sales, retail merchants typically purchase inventory for resale and sell such inventory to an individual consumer for the consumer’s own personal use. See Title 23 VAC 10-500-350 B.

In this case, the Taxpayer indicates that it sold its countertops to commercial customers which included architects, interior designers, general and subcontractors, home builders, kitchen designers and remodelers. These customers then resold the countertops to the homeowners when building or remodeling kitchens. Such sales would qualify as wholesale sales.

In addition, the Taxpayer also sold countertops directly to homeowners. Such sales would be considered retail sales and would not be exempt from BPOL tax.

Personal Property Tax

All tangible personal properly, unless declared intangible under the provisions of Virginia Code § 58.1 1100 et seq ., is reserved for local taxation by Article X, § 4 of the Constitution of Virginia . Included in the category of tangible property that is declared intangible and subject to state taxation only is “[c]apital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters).” See Virginia Code § 58.1 1101 A 2.

The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1 3507 A provides:

Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.

The Court’s three-part test for determining whether a manufacturing activity is being undertaken was also applied to BTPP in Brown Boveri . Although manufacturers are not subject to the BTPP tax, they are subject to the M&T tax on machinery and tools used directly in the manufacturing process.

DETERMINATION

Accordingly, for the tax years at issue, I find that the Taxpayer was a manufacturer for purposes of the BPOL tax and the BTPP tax. As a manufacturer, the Taxpayer was exempt from the BPOL tax on sales at wholesale at the place of manufacture. Any retail sales made, however, would not be exempt.

Further, the Taxpayer was subject to the M&T tax on equipment used in its manufacturing process. Property not used in the manufacturing process would be exempt from local property taxation.

The case will be remanded to the County in order to adjust the assessments of BPOL and BTPP tax for the tax years at issue in accordance with this determination and issue updated bills or refunds, as warranted.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3893.B

Related Documents

97-257

97-146

98-154

09-94

18-164

21-62