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March 3, 2000

Record No. 990409





George E. Honts, III, Judge

PRESENT: Carrico, C.J., Lacy, Hassell, Keenan,
Koontz, and Kinser, JJ., and Whiting, Senior Justice


The issue in this appeal is whether personal
property was used (1) in a sales business and subject to local
taxation, as the trial court held, or (2) in a manufacturing
business and a part of the Commonwealth’s tax base as set forth
in Code ? 58.1-1100, as the taxpayer contends.

Code ? 58.1-1100 segregates most of the
capital of a trade or business as intangible personal property
subject to state taxation only. As pertinent here, one class of
such intangible personal property is defined in Code
? 58.1-1101(A)(2) as "[c]apital which is personal
property, tangible in fact, used in manufacturing . . .
businesses." The tax on tangible personal property used in a
sales business is assessed by localities. Code ? 58.1-3500
(all tangible personal property taxed by localities except
property classified as intangible personal property under Code
? 58.1-1100 or merchants’ capital taxable under Code
? 58.1-3510).

Coca-Cola Bottling Company of Roanoke, Inc.
(the taxpayer) filed an application in the circuit court under
the provisions of Code ? 58.1-3984 seeking a correction in
Botetourt County’s assessment of the taxpayer’s 1994 local
tangible personal property taxes.
[1] The
taxpayer alleged that the county improperly assessed vending
equipment as personal property used in a sales business. The
county filed an answer denying that the assessment was erroneous.

After overruling the taxpayer’s motion for
summary judgment on the pleadings, the court heard evidence and
viewed the taxpayer’s plant. Following argument and consideration
of memoranda from counsel, the court denied the taxpayer’s
petition, holding that the property in issue was not used in the
taxpayer’s manufacturing business, but was used as part of the
taxpayer’s separate sales business. The taxpayer appeals.

The evidence, substantially undisputed, shows
the following. The taxpayer operates under a license from the
holder of a franchise from The Coca-Cola Company for the
production, distribution, and sale of Coca-Cola products. The
taxpayer’s portion of the franchise area encompasses southwestern
Virginia, a portion of the southern Piedmont of Virginia, a
portion of northeastern Tennessee and a portion of southeastern
West Virginia. The taxpayer’s license had the required approval
of The Coca-Cola Company and is subject to the terms of the
licensor’s franchise.

Most of the taxpayer’s product is mixed and
bottled in its Roanoke plant, moved into its warehouses located
throughout its franchise territory, and distributed from the
warehouses to the wholesale purchasers. Approximately one-third
of the taxpayer’s employees are engaged in the manufacture of its
product. The remainder are engaged in administration,
distribution and sales activities.

The taxpayer wholesales most of its product to
retailers such as supermarkets, convenience stores, discount
retailers, hotels, motels, restaurants, gasoline filling
stations, and other such retail outlets. The taxpayer’s wholesale
customers retail some cooled drinks in cooling and dispensing
equipment furnished by the taxpayer.

The taxpayer retails a smaller, but
substantial, portion of its product in coin operated machines
owned or rented by it. The tax status of the vending machines,
coolers, and fountain equipment which the taxpayer owns or rents
from others is the subject of this opinion.


Citing County of Chesterfield v. BBC Brown
Boveri, Inc.
, 238 Va. 64, 380 S.E.2d 890 (1989), the taxpayer
argues that if a substantial part of a firm’s business consists
of the actual process of manufacturing, the firm is a
manufacturing business for tax purposes notwithstanding its
performance of non-manufacturing activities. And the taxpayer
points out that the trial court found that a substantial part of
its business consisted of manufacturing.

However, for a number of reasons, the taxpayer
contests the court’s finding that it conducted a separate sales
business in which it used the taxed equipment. This
finding subjected the taxpayer to another statutory provision
that if a taxpayer is engaged in more than one business, the
taxpayer "shall pay the tax provided by law on each branch
of . . . its business." Code ? 58.1-5.

The taxpayer’s first contention is that the
franchise agreement, which controlled its licensing agreement,
did not permit either the taxpayer’s manufacturing or sales
"activity [to] be performed independently of the
other." Although the franchise agreement is not a part of
the record, we will assume that the taxpayer correctly
characterizes its terms.

Additionally, the taxpayer quotes in part the
court’s description of its manufacturing, distribution, and sales
activities as "vertically integrated functions."
Whether a taxpayer’s activities are considered as two separate
businesses for tax purposes, however, is not determined by the
formal structure of the taxpayer’s functions or the taxpayer’s
relation to its franchiser. Rather, that issue is determined by
the manner in which the taxpayer actually conducts its business. See
Caffee v. City of Portsmouth, 203 Va. 928, 930-31, 128
S.E.2d 421, 422-23 (1962)(retail and wholesale sales in salesroom
portion of bakery’s manufacturing plant constitute a separate
sales business for local license tax purposes). Thus, we reject
the taxpayer’s claim that the terms of the franchise agreement
and its own organizational structure determine its tax status.

Nevertheless, the taxpayer maintains that if a
taxpayer is a manufacturer under Code ? 58.1-1101(A)(2), it
cannot also be classified as conducting a sales business. The
taxpayer claims that the Caffee ruling is inapplicable
here because the license tax statutes involved in Caffee
are unlike the statutes involved in this case. In Caffee,
we said the license tax statutes "show that the legislature
has not classified the business of production and disposition of
goods by a manufacturer into a single, separate subject of
taxation." 203 Va. at 932, 128 S.E.2d at 424. Yet the
taxpayer does not indicate in what way Code
? 58.1-110l(A)(2) has classified the production and sale of
goods into a single business.

Instead, the taxpayer interprets BBC Brown
as holding that "[Code] ? 58.1-1101(A)(2)
classifies a business that engages in manufacturing and
non-manufacturing activities exclusively as a
manufacturer, provided that its manufacturing activities are
substantial." Significantly, the taxpayer provides no
supporting page citation for this proposition from BBC Brown
. Instead, we find the following statement in
that case:

Another area of dispute is whether the design
and engineering stages of a manufacturing job constitute
manufacturing. The record discloses that [the taxpayer’s] design
and engineering work was ancillary either to original
manufacturing work or to a rebuilding job. Thus, because [the
taxpayer’s] design and engineering are integral parts of its
manufacturing activity, such work is properly classified as

238 Va. at 70 n.5, 380 S.E.2d at 893 n.5.

Obviously, the BBC Brown Boveri dispute
was not resolved by applying the taxpayer’s interpretation, but
by considering that the described design and engineering work was
a part of the later process of manufacturing. Unlike the
situation in BBC Brown Boveri, in this case, the
taxpayer’s subsequent sales activities were not a part of its
manufacturing process.

The taxpayer argues, however, that the sales
activity in the taxed equipment indirectly affects its
manufacturing activity because it, like every manufacturer, must
sell its manufactured product in order to continue that activity.
We effectively rejected this argument by our holding in Caffee
that Caffee’s sales room, which disposed of almost all its
manufactured product, was a separate sales business. 203 Va. at
930-31, 128 S.E.2d at 422-23.

Thus, we agree with the County that the
following rule from Caffee applies in this case.

"The business of manufacturing an article
is . . . essentially different from that of selling the
article after it has been manufactured. And the fact that the
article is manufactured for sale cannot have the effect of
obliterating the line of demarkation between the two

203 Va. at 930, 128 S.E.2d at 423 (quoting Consumers’
Brewing Co. v. Norfolk
, 101 Va. 171, 173, 43 S.E. 336, 336
(1903)). Accordingly, we disagree with the taxpayer’s argument
that its sales activities cannot be considered as separate sales
business for the purposes of Code ? 58.1-1101(A)(2).

Even so, the taxpayer construes Code
? 58.1-1101(A)(2) as "exclud[ing] all tangible
personal property used in a manufacturing business
. . . from local taxation, regardless of how indirectly
related the property at issue is to the central function of
manufacturing or how distant the property is from the
manufacturing plant." (Second emphasis added.) We do not
agree with the taxpayer’s argument that this sales equipment
thereby became a part of its manufacturing business as indirectly
related thereto.

In effect, the taxpayer asks us to add the
bracketed words to the following language of Code
? 58.1-1101(A)(2): "[c]apital which is personal
property, tangible in fact, used [directly or indirectly] in
manufacturing . . . businesses." For much the same
reason that we refused to add the word "directly" to
this plain and unambiguous statute when urged to do so by the
city in City of Winchester v. American Woodmark Corp., 250
Va. 451, 457, 464 S.E.2d 148, 152 (1995), we refuse to add either
word here. The word and its expansive scope simply do not appear
in the statute, and we cannot change or amend a statute under the
guise of construing it. Id.; City of Martinsville v.
Tultex Corp
., 238 Va. 59, 63, 381 S.E.2d 6, 8 (1989).

Hence, in deciding whether this sales equipment
was "used in a manufacturing business," we apply the
plain meaning of those words as used in the statute. American
, 250 Va. at 457, 464 S.E.2d at 152. Unlike the
computers and office equipment in the American Woodmark
and Tultex cases, which were used, in whole or in part, in
planning, directing or administering the manufacturing function,
the evidence in this case indicates that the sales equipment in
question was not used in manufacturing but merely in selling the
finished product. Thus, we conclude that the evidence supports
the court’s holding that this equipment could be considered as
sales equipment used in a separate sales business. We need not
decide whether the taxpayer was also engaged in a separate
wholesale business because the taxpayer has not borne his burden
under Code ? 58.1-3984 of showing, which, if any, of the
taxed property was used in sales at the wholesale level.

For these reasons, the judgment will be





[1] Code ? 58.1-3984 provides
that a taxpayer, aggrieved by a local tax assessment, may apply
for relief in the local circuit court. The proceedings are
conducted by the court sitting without a jury, and the burden of
proof is upon the taxpayer to show that the assessment was
invalid or illegal.


[2] It makes no difference whether
the taxpayer owns or leases the personal property in question.
Its use determines its tax status. City of Martinsville
v. Tultex Corp.
, 238 Va. 59, 63, 381 S.E.2d 6, 8 (1989).


[3]At trial, the county argued that the taxpayer was not a
manufacturer under Code ? 58.1-1102(A)(2), but it has not
assigned cross-error to the court’s ruling on this issue.