HD75 - Study of the Proposal to Define Manufacturers for All State and Local Taxes as Defined in the Standard Industrial Classification Manual
Executive Summary: House Joint Resolution 527 of the 1993 Virginia General Assembly requested the Department of Taxation (TAX) to conduct a study on the benefits of adding to Title 58.1 of the Code of Virginia, for all state and local taxes, the definition of "manufacturer" as defined by Standard Industrial Classification (SIC) codes 20 through 39. This study was designed to explore the feasibility of using a uniform definition of "manufacturer" for all state and local taxes; however, local tax issues were the true driving force behind the Resolution. This is because classification as a manufacturer provides a business with significant local tax benefits in the form of exemptions from the local business license, tangible personal property tax and, in some localities, a lower tax rate on machinery and tools. Clearly, local tax administrators, the business community, and Virginia's public and private economic development community are all interested in determining whether a uniform definition of "manufacturer" is a feasible and attainable goal. Local tax administrators and economic development groups have approached this issue along parallel tracks of concern: • Local tax administrators are concerned with the lack of certainty in their classification of businesses as manufacturers, a concern which reflects both administrative and revenue considerations. • Industry and economic development groups are sensitive to the lack of uniformity in classification among localities, which reflects concerns as to a level playing field for business and Virginia's ability to attract and retain business in a competitive national and international environment. Using the SIC codes as a means of classifying manufacturers has both benefits and drawbacks. However, TAX currently uses the system (as the result of a 1983 law change) for purposes of determining eligibility for the sales and use tax manufacturing exemption. Also, at least one locality uses the SIC codes as a tool for managing and administrating local license tax classification. The primary benefits of an SIC code approach appear to be: • Increased uniformity in classification among all localities. • Increased uniformity in defining a manufacturer for all state and local taxes. • Increased certainty as to classification. The major drawbacks of the SIC approach appear to be: • A perception that the SIC codes relating to manufacturing include many types of businesses that would not currently be classified as manufacturers, e.g., processors. • A converse concern that some businesses currently classified as manufacturers would no longer be deemed as such under the SIC codes. • A concern that a manufacturer's tangible personal property and gross receipts may escape local taxation even though the actual manufacturing activity occurs outside the locality's jurisdiction. • A concern that businesses may misclassify themselves, i.e., choose an incorrect SIC code in order to escape local taxation. • Uncertainty as to the revenue implications for localities. Although all of the interested parties in this study share some of the same concerns, the bottom line issue of revenue loss for local governments may render it impossible to obtain immediate resolution -- either in the form of an SIC-based classification system or some other uniform definition of "manufacturer." However, other mechanisms are in place, including the current study of the local license tax pursuant to HJR 526, which will allow the interested parties to further explore the issue. |
Menu
Published Documents
