Tax Type
Retail Sales and Use Tax
Description
Dredging business, untaxed purchases of tangible personal property
Topic
Exemptions
Property Subject to Tax
Date Issued
01-03-2001
January 3, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *********
This is in response to your letter of July 20, 2000, requesting correction of the retail sales and use tax assessment issued to **** (the "Taxpayer"), for the period February 1994 through January 2000.
FACTS
The Taxpayer is engaged in the dredging business, with operations primarily on intercoastal and other interstate waterways. An audit by the department resulted in the assessment of use tax on untaxed purchases of tangible personal property used or consumed in the Taxpayer's dredging operations.
The Taxpayer maintains that all items used in connection with its dredging operations are exempt from retail sales and use tax based on the provisions set out under Code of Virginia §58.1-609.3(4). The Taxpayer also maintains that it has paid sales tax on certain items included in the department's audit and requests the removal of such items from the audit.
DETERMINATION
Effective July 1, 1996, the sales and use tax exemption found in Code of Virginia §58.1609.3(4) was expanded to include:
. . . dredges, their supporting equipment, attendant vessels, and fuel and supplies for use or consumption aboard such vessels, provided the dredges are used exclusively or principally in interstate or foreign commerce.
In a 1996 fiscal impact statement (copy enclosed) prepared for Senate Bill 120, the department interpreted the above (but then proposed) exemption as follows:
This bill would codify the department's current policy exempting dredges and attendant vessels used directly in the dredging of interstate waterways and would expand the exemption for ships and vessels to include supporting equipment and other attendant vessels used or to be used in dredging operations exclusively or principally in interstate commerce. Specifically, the expanded exemption . . . would apply to vessels used to survey and mark the dredge area, repair parts for such vessels, buoys, fuel to power equipment aboard the dredge and other vessels, rope, chains, and other tangible personal property used in dredging operations exclusively or principally in interstate commerce.
Fuels used in commercial boats for propelling such vessels are exempt from the retail sales and use tax, whether the ships are used in intrastate or interstate commerce. (See Code of Virginia § 58.1-609.1(6)). However, fuels used aboard ships and vessels which do not "ply the high seas," either in intercoastal trade between ports in the Commonwealth and ports in other states or in foreign commerce, are subject to the retail sales and use tax. Currently, fuel used aboard dredges and attendant vessels to power equipment is subject to the tax. This bill would also exempt such fuels. (Bold emphasis added.)
Pursuant to the expanded exemption, there is no requirement that a dredge or its attendant vessels ply the high seas in order to qualify for the exemption on fuel and supplies used or consumed aboard such vessels. Accordingly, the retail sales and use tax exemption provided by Code of Virginia § 58.1-609.3(4) appears to apply to all of the contested items (except as provided below), including food, safety and support supplies furnished gratuitously by the Taxpayer to its crews for use or consumption while aboard the dredges or attendant vessels.
The exemption applies to supporting equipment which is used aboard dredges or in connection with the actual dredging process. The exemption does not apply, however, to landbased equipment, such as bulldozers, hauling vehicles, tractors, etc., when used for sludge removal, beach refurbishment, or in other activities after the dredging process has ended.
The fuel and supplies exemption does not apply to fuel, food, safety equipment and other supplies used or consumed at the Taxpayer's yard or any place that is apart, or away from (i.e., not aboard) the dredge or its attendant vessels. Nor does the exemption apply to office supplies, desks, file cabinets and other administrative items not used aboard dredges or their attendant vessels.
Code of Virginia § 58.1-609.3(4) also provides an exemption for "tangible personal property used directly in the building, conversion or repair of the ships or vessels covered bar this subdivision." (Emphasis added.) Thus, supplies and equipment used directly in other types of building, conversion or repair activities are not covered by this exemption and are, therefore, subject to the tax. For example, welding equipment used directly to repair a component part of a dredge is used in an exempt activity; however, when the same equipment is used to repair metal buildings, fences, trucks or any other item not a ship or vessel covered by the above exemption, it is used in a taxable activity. Thus, equipment and supplies used for general yard maintenance, for example, are not used directly in shipbuilding, conversion or repair activities and are taxable. In the event an item is used in both taxable and exempt activities, the tax due must be prorated between the percentage of use in taxable and exempt activities.
I would also note that motors used to power a survey boat or other vessel and bought separately from the purchase of such boat or watercraft are subject to the 2% watercraft sales and use tax. See Code of Virginia § 58.1-1400, et seq. There is no exemption from the watercraft sales and use tax for motors used to power a survey boat, any other type of attendant vessel or dredge.
In regard to certain uncontested items which the Taxpayer now claims to have paid the sales or use tax, the *** District Office informs me that the Taxpayer has not provided any documentation on this matter. Accordingly, someone from the *** District Office will contact you to arrange for the receipt of such information. If the Taxpayer's claim can be verified, the audit will be adjusted to remove such items from the audit.
The audit assessment will be revised in accordance with this determination as soon as practical. If you have any questions about the audit revision, please contact ***, Audit Supervisor, District Office, at ***.
If you have any questions about this response, please contact *** in the department's Office of Tax Policy at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner