using sqlcmd and XML ON to output sql into an XML file.

I have a sql script that writes the selection into xml format. I am trying to write a batch file that will output this data into an xml file. Using :XML ON I am receiving the following error in the output file:

<?MSSQLError HResult="0x80004005" Source="Microsoft XML Extensions to SQL Server" Description="No description provided"?>
HResult 0x80004005, Level 16, State 1
No description provided

my .bat file code:
sqlcmd -i "ProductHierarchy-Dept-Cat-Subcat.sql" -S "SC-L-WINSQL-001" -d "HQ_L" -o "output.xml" -y0

If I turn :XML OFF it prints out the entire data selection into one line.

SET NOCOUNT ON 
SET QUOTED_IDENTIFIER ON
SET ANSI_NULLS ON

--drop tables if exist
If(OBJECT_ID('tempdb..#importType') Is Not Null)
Begin
    Drop Table #importType
End

--select data
If(OBJECT_ID('tempdb..#AMSprocuctHierarchy') Is Not Null)
Begin
    Drop Table #AMSprocuctHierarchy
End

select 
	distinct DIM.pos_dept as Department, 
	SD.DESCRIPTION as DeptDesc,
	--left(DIM.category,4) as Category, 
	--right(rtrim(DIM.category),4) as Subcategory,  
	DIM.upc as UPC, DIM.description as ItemDesc, 
	substring(DIM.CATEGORY, 1, 4) as Category, 
	substring(DIM.CATEGORY, 5, 8) as SubCategory, 
	CAT.DESCRIPTION as CategoryDesc,
	subcat.DESCRIPTION as SubcatDesc
		into #AMSprocuctHierarchy
			from DHAT_ITEM_MASTER DIM
			join store_department SD on DIM.pos_dept = SD.STORE_POS_DEPARTMENT
			join CATEGORY subcat
			   on subcat.CATEGORY = DIM.CATEGORY
			join CATEGORY cat
			   on cat.CATEGORY = substring(DIM.CATEGORY, 1, 4) + '0000    '
			   order by Dim.pos_dept

--Create file types table
create table #importType
	(
		Type Varchar(100)
	)
insert into #importType
	(Type)
	VALUES('Department'),('Brand'),('Vendor'),('Location')
--select * from #importType

-----------------------------------------------------------------------------------------------------------------------
--xml output

declare @xml xml 

set @xml = (Select  
--remove ProductHierarchy
	(select Type as HierarchyID from #importType
		where type = 'Department' 
			for xml raw ('RemoveHierarchy'), ELEMENTS, type
	),

--add ProductHierarchy
	(select Type as HierarchyID, 'Dept' as LeafName from #importType
		where type = 'Department' 
			for xml raw ('AddHierarchy'), ELEMENTS, type
	),

--Add Deparment hierarchy
	(Select 
		distinct 'Department' as HierarchyID,  
		rtrim(Department) as Branch, 
		rtrim(DeptDesc) as LeafName,
		rtrim(DeptDesc) as DisplayID
		from #AMSprocuctHierarchy
				for xml raw ('AddBranch'), ELEMENTS,type
	),	
--Add Categories
	(
	Select 
		distinct 'Department' as HierarchyID,  
		rtrim(Department) +','+ Category as Branch,
		rtrim(CategoryDesc) as LeafName,
		rtrim((Category) + ' - ' + (CategoryDesc)) as DisplayID
		from #AMSprocuctHierarchy
				for xml raw ('AddBranch'), ELEMENTS, type
	),
--Add Sub-Categories
	(
	Select 
	distinct	'Department' as HierarchyID,  
		rtrim(Department) +','+ Category +','+ rtrim(SubCategory) as Branch,
		rtrim(SubcatDesc) as LeafName,
		rtrim(SubCategory) + ' - ' + rtrim(SubcatDesc) as DisplayID
		from #AMSprocuctHierarchy
				for xml raw ('AddBranch'),ELEMENTS,Type
	) 
	for xml raw ('ProductHierarchy'), ELEMENTS XSINIL,Type
	)


:XML ON
select @xml 

SET NOCOUNT OFF

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