Virginia Law

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 § 58.1-3703 C 4 of the Code of Virginia.