Sales Tax State Activity Update - July 2004

Virginia Rules Microbrewery Operations are Not Industrial in Nature

In a recent letter ruling, the Virginia Department of Taxation ruled that equipment used in the operation of a restaurant’s on-site brewery was taxable because the operations were not industrial in nature. The taxpayer operates a restaurant with an on-site microbrewery operation. The preponderance of microbrewery beer sales occurs on premises and is not off-site beer sales. The taxpayer was audited and assessed use tax on its purchase of brewing equipment used at the restaurant.

The taxpayer maintains its restaurant and brewery operations should be treated separately and its brewing operations are properly classified as manufacturing malt beverages in accordance with Standard Industrial Classification Code (“SIC”) 2082. The Virginia Code limits the exemption for equipment used in the manufacturing process to those processes that are industrial in nature as evidenced by SIC 10 through 14 and SIC 20 through 29. Virginia Administrative Code establishes manufacturing of tangible personal property as an incidental part of a retail or service business as non-industrial activities. In order for tangible personal property to be exempt, the preponderance of its use must be in exempt industrial production activities. (i.e. fifty percent or more).

The auditor determined the taxpayer’s business activities were properly classified as SIC 5812 Eating Places and SIC 5813 Drinking Places, specifically alcohol and more than fifty percent of beer sales are for direct sale on the premise to consumers. In this case, the Virginia Department of Taxation agreed with the audit findings and ruled the preponderance of the equipment’s use was in non-industrial activities and therefore subject to tax.

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