Rulings of the Tax Commissioner

March 15, 2023

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

Dear *****:

This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the taxable period January 2016 through December 2018. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a Virginia business entity, engaged in several related business transactions, including industrial manufacturing, fabricating, and contracting. Under second generation audit, the auditor determined that the Taxpayer was primarily an industrial manufacturer, and held several purchases and fixed assets as exceptions because the Taxpayer could not show that tax had been properly charged and remitted. The Taxpayer appealed, contesting the assessment of tax related to 1) an excavator used as part of its waterjet manufacturing process, and 2) the purchase of a pressure washer used to clean and coat items that are repaired for a customer that has a direct pay permit with the Department. In the alternative, the Taxpayer requests that penalty and interest be abated. 

DETERMINATION

Manufacturing Exemption

Virginia Code § 58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery, tools, fuel, power, energy, or supplies used directly and predominantly by industrial manufacturers in manufacturing products for sale or resale. Title 23 of the Virginia Administrative Code (VAC) 10-210-920 further explains the activities that constitute exempt manufacturing activities and examples of tangible personal property that are exempt or taxable under the exemption. Specifically, 23 VAC 10-210-920(C)(2) provides that tangible personal property used to dispose of a facility’s waste and pollutants is generally taxable.  

Excavator

The Taxpayer argues that the excavator should be exempt from retail sales and use tax, similar to other items used in the water jet process, because it is an integral part of that process. The information provided, however, shows that the excavator is used exclusively to dispose of the waste material produced during the water jet process and that the water jet process is used in manufacturing activity. As indicated above, the removal of waste materials is not considered a part of the exempt production activity.

Power Washer

The Taxpayer explains that the pressure washer is used exclusively to passivate (clean & apply a protective coating) items for its customer that has a direct payment permit, and the customer requests that the Taxpayer not charge tax on its transactions. In general, tax is not charged on tangible personal property sold to a customer that holds a direct pay permit.  

Title 23 VAC 10-210-920(F) states:

Direct payment permits. An industrial manufacturer may apply for a direct payment permit … when it is not possible at the time tangible personal property is purchased to know how it will be used.  When such a permit is issued by the Department of Taxation, a manufacturer may file copies of the permit with vendors and pay directly to the department any tax that is due based on the use made of the purchases. No such permit, however, can be issued unless it is conditioned upon an arrangement under which no county or city will suffer the loss of any local sales or use tax revenue by reason of the issuance of the permit.

The power washer at issue, however, was not sold to the Taxpayer’s customer. Instead, it was used by the Taxpayer under a contract to provide repair services on tangible personal property used by its customer. As such, the evidence available does not suggest that the power washer is part of a process of manufacturing new products.  

Penalty and Interest Waiver

The Taxpayer requests that, should the assessment be upheld, penalty and interest be abated and refunded. However, the Taxpayer was not charged any penalty on the assessment at issue. The assessment of interest is mandatory pursuant to Virginia Code § 58.1-1812. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money over a period of time. In this instance, the Taxpayer had the use of money that was properly due to the Commonwealth.

CONCLUSION

Based on this determination, the excavator was properly held taxable because it was used exclusively in waste removal, which is not considered an exempt production activity pursuant to the manufacturing exemption to the retail sales and use tax. Likewise, the power washer was properly held taxable because it was not tangible personal property sold to the holder of a direct payment permit, nor does it appear to qualify for an exemption to the retail sales and use tax. Finally, no penalty was assessed, and the Department lacks the authority waive interest in this case. Accordingly, the assessment is upheld as issued. Because the assessment has been paid in full, no further action is required. 

The Code of Virginia sections and regulation cited are available online at www.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, Appeals and Rulings, at *****, or via email at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/2200-C