Virginia: Catering Company Did Not Qualify for Industrial Manufacturing Exemption

In a recent ruling, the Virginia Department of Taxation addressed various issues associated with an audit of an airline catering company that contracted with airlines to provide in-flight meals. One of the issues in the audit was whether the taxpayer qualified for the Commonwealth’s industrial manufacturing sales tax exemption.  The taxpayer prepared meals in airport kitchens and worked with each airline’s chef to create meals that were particular to the airline’s standards and needs. Cooked meals were then packaged and loaded onto aircraft. Under Virginia law, a sales and use tax exemption applies to machinery or tools used directly in “processing, manufacturing … or converting products for sale or resale.” The Department’s regulation, in line with Virginia case law, further provides that to qualify for the exemption, the production must be “industrial in nature.” The taxpayer argued that its food preparation process was exempt because it was converting raw food materials into finished meals and was therefore engaged in manufacturing. As such, the taxpayer’s believed its purchases of blast chillers, gas work ranges, a cooler condenser replacement, and food delivery and production system were exempt. The Department first noted that the Virginia courts had previously considered the scope of the exemption and had generally held that it applied to a taxpayer’s operations that were industrial in nature. A business was considered “industrial in nature” if it fell within certain SIC and NAICS codes assigned to industrial classifications. The taxpayer, the Department observed, had changed its NAICS code classification after the audit to fall within the industrial classification. Particularly, the taxpayer argued that it fell within NAICS code 311991, Perishable Food Manufacturing, because it was engaged in manufacturing perishable prepared food in the airport kitchens. Although agreeing that the taxpayer processed prepared foods, in the Department’s view, the taxpayer’s activities were more appropriately classified under the airline food services contractors NAICS code. This classification includes “establishments primarily engaged in providing food services at institutional, governmental, commercial, or industrial locations of others based on contractual arrangements with these types of organizations for a specified period of time. The establishments under this classification provide food services for the convenience of the contracting organization or the contracting organization's customers.”   The Department concluded that this classification was more reflective of the taxpayer’s activities, and that the taxpayer did not qualify for the industrial manufacturing exemption. For more information on Policy Document 20-139, please contact Sarika Bakshi at 703-286-8467.