We cut, bend, and shear metal for customers. Does that make us a manufacturer that can buy equipment exempt from Virginia sales tax?

Plain-English summary

A steel and metals retailer-wholesaler with three locations was audited for retail sales and use tax (June 2017 through June 2020). The auditor found the company did some processing — cutting, bending, and shearing metal — but only in roughly 15 to 20% of its operations, and denied the manufacturing exemption, assessing tax on the company's untaxed purchases. The company appealed, arguing its cutting, bending, and shearing work qualified. The Tax Commissioner upheld the assessment.

The exemption — and the catch. Virginia exempts machinery, tools, and supplies used directly in manufacturing or industrial processing (Va. Code § 58.1-609.3 2; 23 VAC 10-210-920). The Department agreed the company did engage in processing — both sides even agreed a specific metal-cutting machine was used in processing, not manufacturing. But an exemption isn't triggered just by doing some processing. Under the Department's long-standing rule, a business gets the manufacturing/processing exemption only if it is "primarily engaged" in manufacturing or industrial processing, which the Department reads as at least 50% of its operations (P.D. 99-43, 20-72).

Why the numbers sank the claim. The company's own reported NAICS code, 423510, describes metal service centers — wholesale distributors that "may perform functions such as sawing, shearing, bending, leveling, cleaning, or edging on a custom basis as part of their sales transactions." That is incidental processing attached to a distribution business, not a manufacturing operation. And the facts matched: the company told the auditor that roughly 80% of its operations did not involve cutting or processing, and that only about 12 to 15% of sales involved any cutting, bending, or other processing — well short of 50%.

Burden of proof. A Department assessment is prima facie correct, so the taxpayer must prove it wrong (Va. Code § 58.1-205). The company didn't provide evidence that it was primarily engaged in processing, so the manufacturing exemption was properly denied and the assessment upheld (an updated bill with interest issues; no further interest if paid within 30 days).

What this means for you

Metal service centers, fabricators, and others that do some processing

Doing real processing work doesn't earn you the manufacturing exemption unless processing (or manufacturing) is your primary activity — the Department's threshold is 50% of operations. A distributor or wholesaler that cuts, bends, or shears on the side, as part of filling orders, generally falls below that line. Your NAICS classification matters: a wholesale/service-center code (like 423510) signals to the Department that processing is incidental to distribution.

If you plan to claim the manufacturing exemption

Be ready to quantify your operations. Casual statements to an auditor — here, "about 80% isn't processing" and "12 to 15% of sales involve cutting" — become the record. If you truly are primarily a processor, document it (production volumes, revenue mix, floor-space or labor allocation) rather than relying on the fact that you own processing equipment.

Tax professionals

The exemption turns on the "primarily engaged" (≥50%) test, not on whether any given machine is used in processing (the Department conceded the machine here was). Reconcile the client's claimed exemption with the NAICS code it reports on its income tax returns — an inconsistent code undercuts the claim — and remember the assessment is presumed correct under § 58.1-205.

Common questions

Q: We cut and bend metal for customers. Doesn't that make us a manufacturer eligible for the exemption?
A: Not by itself. The Department agreed this taxpayer did processing, but the manufacturing exemption requires being primarily engaged — at least 50% of operations — in manufacturing or industrial processing. Here processing was only about 12 to 20%, so the exemption was denied.

Q: How does the Department measure whether we're "primarily" a manufacturer?
A: By the share of your operations that is manufacturing/processing (its threshold is 50%), informed by your reported NAICS code and your own description of the business. A wholesale/service-center code plus statements that most of your work is distribution point away from the exemption.

Q: Both the auditor and we agreed a machine was used in processing. Why did we still lose?
A: Because eligibility depends on the business being primarily engaged in processing, not on whether a particular machine does processing. Agreeing the machine was used in processing didn't change that only a small share of the overall operation was processing.

Q: Who has to prove what on appeal?
A: You do. A Department assessment is prima facie correct (Va. Code § 58.1-205), so the burden is on the taxpayer to show it's wrong. This taxpayer didn't provide evidence it was primarily engaged in processing, so the assessment stood.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-203 — Department's authority to interpret and enforce the tax laws
• Va. Code § 58.1-609.3 2 — manufacturing/processing exemption for property used directly in a manufacturing process
• Va. Code § 58.1-602 — "industrial in nature" defined by SIC/NAICS classification
• Va. Code § 58.1-205 — assessment prima facie correct; burden on the taxpayer
• 23 VAC 10-210-920 A, B — "used directly" and the integrated-manufacturing-process standard

Authorities the Commissioner relied on (described here, not linked): prior public documents holding that the exemption requires being primarily (at least 50%) engaged in manufacturing or industrial processing (P.D. 99-43, P.D. 20-72); Department of Taxation v. Orange-Madison Cooperative Farm Service, 220 Va. 655 (1980) (processing vs. manufacturing); and the strict-construction cases Commonwealth v. Community Motor Bus, 214 Va. 155 (1973), Commonwealth v. Research Analysis Corp., 214 Va. 161 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-86

Original ruling text

June 20, 2025

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period June 2017 through June 2020.

FACTS

Audits were conducted on the books and records of the Taxpayer, a retailer and wholesaler of steel and other metals at three separate locations. The auditor found that the Taxpayer was engaged in processing activities in approximately 15 to 20% of its business operations. As a result, the auditor determined that the Taxpayer was ineligible for the manufacturing exemption and issued an assessment for tax and interest due on untaxed purchases. The Taxpayer filed an application for correction contending that certain equipment and related purchases qualify for the manufacturing exemption because its operations included cutting, bending, and sheering metal materials for wholesale.

ANALYSIS

Strict Construction of Exemptions

The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, settled Virginia case law requires strict construction of sales and use tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus , 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation , 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).

Manufacturing

Virginia Code § 58.1-609.3 2 provides an exemption from the sales and use tax for property purchased for direct use in a manufacturing process. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 A provides that the exemption applies to “machinery, tools or repair parts…or supplies used directly in manufacturing or processing.” Title 23 VAC 10-210-920 B defines “used directly” as “those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance…” This definition further states that “[t]he integrated manufacturing process…includes the production line of a plant...starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where products are finished or completed for sale…”

The Department uses the NAICS Manual to determine those industries that qualify as industrial processors or manufacturers. Virginia Code § 58.1-602 provides that the term “industrial in nature” includes all businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (“SIC”) Manual. The SIC Manual has since been replaced with the North American Industrial Classification System (“NAICS”) Manual, most recently updated in 2022.

Accordingly, the auditor and Taxpayer both agree that the NAICS code 423510 reported by the Taxpayer on its income tax returns is an accurate description of its business operations. This industry encompasses “. . . establishments primarily engaged in the merchant wholesale distribution of products of the primary metals industries. Service centers maintain inventory and may perform functions, such as sawing, shearing, bending, leveling, cleaning, or edging, on a custom basis as part of their sales transactions.”

The Taxpayer, citing Department of Taxation v. Orange-Madison Cooperative Farm Service , 220 Va. 655 (1980), contends that it was a processer, not a manufacturer. The Department agrees that the Taxpayer engaged in processing, not manufacturing. The Taxpayer specifically asserts that the purchase of a ** machine, which is used to cut metal plating, was used in processing, not manufacturing. The Department concurs that the **** machine was used in processing and not manufacturing.

The Department, however, has previously ruled that a taxpayer is entitled to take the manufacturing exemption only if it is primarily engaged in manufacturing or industrial processing activities. See Public Document (P.D.) 99-43 (3/31/1999) and P.D. 20-72 (4/28/2020). The threshold for being “primarily engaged” is at least 50%. During a meeting with the audit staff, the Taxpayer stated that roughly 80% of its operations did not involve cutting or other processing. The audit staff were also told on a tour of one of the Taxpayer’s facilities that only 12 to 15% of sales involving any cutting, bending, or other processing. Accordingly, the auditor concluded that the Taxpayer was not primarily engaged in manufacturing its inventory could not avail of the manufacturing exemption to make tax-free purchases.

DETERMINATION

Pursuant to Virginia Code § 58.1-205. any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon the taxpayer to show that the assessment is in error. The Taxpayer has not provided evidence that it was primarily engaged in processing. Accordingly, the manufacturing exemption was properly denied, and the assessment is upheld. An updated bill, with interest accrued to date, will be issued to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3910.B

Related Documents

99-43

20-72