Tax Type
Retail Sales and Use Tax
Description
Components of Dry Kiln that Become Real Property
Topic
Basis of Tax
Property Subject to Tax
Date Issued
12-04-2001
December 4, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period April 1997 through January 2000. I apologize for the delay in the department's response.
FACTS
The Taxpayer manufactures, sells, and installs dry kiln systems. Dry kilns are used to dry green, or newly cut, lumber. The Taxpayer sells the dry kiln systems on an installed or uninstalled basis. The department treated the Taxpayer as a contractor with respect to sales of dry kiln systems that it installed. Based on this treatment, use tax was assessed on the components of the dry kiln that became real property upon installation. Items treated as taxable in the audit include ceiling and wall baffles, baffle floors, truck rails, the roof, structural framework, control rooms, catwalks, monorails and hoists. The Taxpayer maintains that the entire dry kiln system functions as a single piece of equipment and qualifies for exemption from the sales and use tax as equipment and machinery used directly in manufacturing.
DETERMINATION
The department has previously addressed the issue of dry kilns in Public Document 89-327 (11/20/89). The Tax Commissioner determined that the structural components of dry kilns, such as walls, floors, ceilings, and doors, do not play an immediate role in the manufacturing process or the quality control process. These items were considered taxable despite the fact that the items were indispensable to the drying of green lumber and helped expedite production. This position is based on decisions made by the Virginia Supreme Court in Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978) and Commonwealth, Department of Taxation v. Wellmore Coal Corp., 228 Va. 149, 320 S.E.2d 509 (1984).
In support of its position, the Taxpayer cites Revenue Ruling 69-557, which was issued by the Internal Revenue Service regarding the classification of dry kilns for investment credit purposes. The Internal Revenue Service determined in this ruling that dry kilns were machinery and equipment. For retail sales and use tax purposes, the department is not bound by the Internal Revenue Service classification of dry kilns as machinery and equipment for investment credit purposes. Based on the applicable sales and use tax regulations, decisions of the Virginia Supreme Court, and the department's longstanding policy, the audit assessment is correct.
I note that the Taxpayer has paid the assessment in full. If you have any questions regarding this matter, please contact ***** in the Office of Policy and Administration, Policy Administration, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/33077S
Rulings of the Tax Commissioner