Tax Type
Retail Sales and Use Tax
Description
Multi-state Horse Breeding Operation; Horse Racing Operation
Topic
Exemptions
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
08-15-1989
[Opinion - Virginia Attorney General: 1989 at 327]
REQUEST BY: Honorable Raymond R. Guest, Jr. Member, House of Delegates 27 South Royal Avenue Front Royal, Virginia 22630
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
You ask several questions concerning the use tax in Virginia as it concerns the factual situation described below.
I. Facts
A corporation owns and operates a thoroughbred horse breeding farm in Virginia, in addition to breeding or training facilities in Delaware, South Carolina and Kentucky. The company maintains a broodmare band in Virginia.
The corporation also purchases yearlings in Kentucky. You state that no Kentucky sales tax is paid on the Kentucky purchases. Within six months of the purchases, these yearlings are brought from Kentucky to the Virginia farm and are turned out with the offspring of the farm's broodmares.
All of the yearlings are raised in Virginia until about November 1 of the year following their birth, when they are shipped out of state to be trained and eventually raced. When the offspring are retired permanently from racing, they are either retained for breeding, sold as breeding prospects or otherwise disposed of, depending on each horse's race record.
Virtually all of the company's breeding stock moves between its facilities in Kentucky and Virginia during the year. The race horses move from racetrack to racetrack in states other than Virginia, although racehorses may return to the Virginia facility temporarily for rest and rehabilitation from injury before returning to the racetrack.
II. Applicable Statutes and Regulations
Section 58.1-604 of the Code of Virginia imposes a tax upon the use of tangible personal property in the Commonwealth. Such property is taxed "on the basis of its cost price if such property is brought within this Commonwealth for use within six months of its acquisition." § 58.1-604(1). If the property is brought within the Commonwealth six months or more after its acquisition, the tax is based on the lower of its cost price or its current market value at the time of its first use in the Commonwealth. § 58.1-604(1) further provides:
Such tax shall be based on such proportion of the cost price or current market value as the duration of time of use within this Commonwealth bears to the total useful life of such property (but it shall be presumed in all cases that such property will remain within this Commonwealth for the remainder of its useful life unless convincing evidence is provided to the contrary).
Section 58.1-608(2)(a) provides an exemption from the use tax for "breeding and other livestock . . . necessary for use in agricultural production for market and sold to or purchased by a farmer."
Section 58.1-203 grants the Tax Commissioner "the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department [of Taxation]." § 58.1-203(B) requires that the Tax Commissioner's regulations be promulgated in accordance with the Administrative Process Act.
Section 58.1-205 provides that, in any proceeding relating to the interpretation or enforcement of the tax laws of the Commonwealth, "[a]ny regulation promulgated as provided by subsection B of § 58.1-203 shall be sustained unless unreasonable or plainly inconsistent with applicable provisions of law." § 58.1-205(2).
Pursuant to the authority granted by § 58.1-203, the Tax Commissioner has issued sales and use tax regulations, which provide, in part:
A. Generally. The [sales and use] tax does not apply to . . . breeding and other livestock . . . sold to farmers for use in agricultural production for market. . . . A farmer not engaged in the business of producing agricultural products for market cannot claim any agricultural exemptions.
B. Farmer-horse breeder. The production for sale of colts on a horse farm is regarded as 'agricultural production.' Horses used exclusively for the purpose of breeding colts for sale . . . can be purchased tax exempt by the farmer-horse breeder.
Horses purchased for racing or showing are subject to the tax since they are not used exclusively for breeding purposes.
Va. Dep't Tax'n, Va. Retail Sales & Use Tax Regs. ("Tax Regs.") § 630-10-4 (1985) (emphasis added).
III. Agricultural Exemption Inapplicable to Purchases of Horses for Racing
Your first question is whether the agricultural exemption in § 58.1-608(2)(a) operates to exempt yearlings, which have been purchased in Kentucky and brought into Virginia shortly after purchase, from the use tax imposed pursuant to § 58.1-604. Although the statutory exemption for agricultural products in § 58.1-608(2)(a) has been amended several times since its initial enactment, it has provided consistently that only property acquired "for use in agricultural production for market" is entitled to the exemption. Words in statutes are to be given their usual, commonly understood meaning. 1987-1988 Att'y Gen. Ann. Rep. 153, 154. The common meaning of the term "market" is a place where merchandise is sold. The American Heritage Dictionary 767 (1985). It is my opinion, therefore, that the phrase "for market," as it is used in § 58.1-608(2)(a), is synonymous with the phrase "for sale."
It is further my opinion that Tax Regs. § 630-10-4(A) and (B), quoted above, confining the agricultural exemption to horses used exclusively for the purpose of breeding horses "for sale," is a reasonable interpretation by the Tax Commissioner of the statute and is in conformity with the established principle that tax exemptions are to be narrowly construed. See Commonwealth v. Research Analysis, 214 Va. 161, 198 S.E.2d 622 (1973). Although the yearlings purchased in Kentucky eventually may be used for breeding, they are purchased for racing, not exclusively for breeding. Based on the above, it is my opinion that the purchase of these yearlings is not exempt from the sales and use tax.1 Likewise, under § 58.1-608(2)(a), only the feed and supplies purchased for horses used exclusively for breeding other horses for sale are exempt from sales tax.
IV. Whether Use Tax May Be Prorated Pursuant to § 58.1-604. Is Question of Fact to Be Determined by Tax Commissioner
If the purchase of the yearlings is not exempt from use tax under § 58.1-608(2)(a), you ask whether the use tax may be prorated, as provided in § 58.1-604. It is presumed in § 58.1-604 that property brought within the Commonwealth will remain within the Commonwealth for its entire useful life. If the taxpayer can establish the contrary by "convincing evidence," however, the statute provides for proration of the use tax based on the duration of time of use within the Commonwealth.2
Whether convincing evidence has established that property will not remain within the Commonwealth for the remainder of its useful life is a question of fact to be determined by the Tax Commissioner pursuant to the authority granted by §§ 58.1-601(A) and 58.1-1821.
V. Use Tax Imposed Under § 58.1-604 in Facts Presented Does Not Violate Commerce Clause of Constitution of United States
You next ask whether the yearlings may be taxed as soon as they enter Virginia, before "interstate commerce is complete," consistent with the Commerce Clause of the Constitution of the United States. The facts you present indicate that the destination of the yearlings purchased in Kentucky is the corporation's farm in Virginia and that the yearlings are not merely passing through Virginia in the stream of commerce.
The Supreme Court of the United States consistently has upheld the validity of a state's sales and use tax in facts similar to the facts you present. In Nashville, C. & St. L. Ry. v. Wallace, 288 U.S. 249 (1933), for example, the state taxed the purchase of gasoline brought into the state to be stored and later to be withdrawn and shipped both within and without the state. The Supreme Court upheld the tax, holding that once the gasoline was unloaded, it "ceased to be a subject of transportation in interstate commerce and lost its immunity as such from state taxation." Id. at 266. The fact that part of the gasoline was later to be withdrawn and transported outside the state "did not affect the power of the state to tax it all before that transportation commenced." Id. (emphasis added).
Virginia's use tax does not discriminate against interstate commerce in the facts presented. A use tax protects a state's revenues "by taking away from inhabitants the advantages of resort to untaxed out-of-state purchases" and protects local merchants "against out-of-state competition from those who may be enabled by lower tax burdens to offer lower prices." Miller Bros. Co. v. Maryland, 347 U.S. 340, 343 (1954). The purpose of the tax is to establish equality, not to disadvantage interstate commerce. See McGoldrick v. Berwind-White Co., 309 U.S. 33 (1940); Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980).
Virginia's sales and use tax scheme also does not burden interstate commence by subjecting transactions to double taxation. The taxpayer is not subject to the payment of both a sales and use tax on the same transaction. See § 58.1-604(3). The taxpayer is entitled to a credit equal to the amount of tax paid in the state of purchase on the use in Virginia of property purchased in another state. See § 58.1-611.
VI. Sufficient Nexus Exists to Support Use Taxation
You also ask whether the taxpayer's racing operations have a "substantial nexus" to Virginia to support the taxation of horses purchased for racing or to support taxation without apportionment of the purchase price based on use.
Section 58.1-602 defines "sale" as "any transfer of title or possession" of tangible personal property. "Use" is defined as "the exercise of any right or power over tangible personal property incident to the ownership thereof." Id. The use tax is complementary to the sales tax, one taxing the transfer of ownership and the other taxing the use of the property incident to such transfer.3 The basis for either the sales or use tax is the transaction which transfers ownership. In the facts you present, if the taxpayer had purchased the yearlings in Virginia, he would have been subject to the payment of sales tax on the full transaction. It is my opinion, therefore, that the taxpayer to whom your inquiry refers likewise is subject to the payment of the use tax on the entire purchase, computed on the basis of the cost or current market value of the horses.
VII. Conclusion
In summary, it is my opinion that Virginia's sales and use tax scheme is not in conflict with the Commerce Clause of the Constitution of the United States. The transaction you present is subject to the use tax because the facts do not satisfy the exemption requirements in § 58.1-608(2)(a) and the applicable regulations of the Tax Commissioner. Whether the use tax may be prorated is a question of fact to be determined by the Tax Commissioner.
With kindest regards, I am
1 The "use" language in § 58.1-608(2)(a) should not be confused with the "use" language in § 58.1-604. Under § 58.1-604, the tax liability attaches when the property is brought within the Commonwealth for use, regardless of what that use might be. The "first use" language in § 58.1-604 establishes the time for determining the current market value of property brought into the Commonwealth six months or more after its acquisition.
Under § 58.1-608(2)(a), the property must be acquired to be "used" for agricultural production for market for the exemption to apply. This exemption contains no "first use" language, and Tax Regs. § 630-10-4(B) contains an "exclusive use" requirement.
2 You also ask whether the use tax may be prorated on the basis of the use to which the horses will be put during their useful lives, with the tax applying only to the percentage of their lives that will be spent racing. No existing statute or regulation authorizes such a proration of the use tax.
3 Although the tax is computed on the basis of the cost or market value of the property, the tax is not the same as an annually recurring tax on personal property. See Sullivan v. United States, 395 U.S. 169 (1969). Neither is the tax equivalent to a license tax or other tax on the privilege of doing business in the state. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
Attorney General's Opinion