Tax Type
Retail Sales and Use Tax
Description
Construction equipment; "First use"; Manufacturing exemption
Topic
Exemptions
Property Subject to Tax
Date Issued
03-28-2001
March 28, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of a sales and use tax audit assessment issued to **** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a contractor engaged solely in building athletic tracks. An audit for the period March 1997 through December 1999 resulted in the assessment of use tax on untaxed purchases of equipment shipped into Virginia and other tangible personal property used in its operations.
The Taxpayer takes exception to the use tax assessed on its track construction equipment and maintains that this equipment qualifies for the industrial manufacturing exemption set out by Code of Virginia § 58.1-609.3(2). The contested equipment consists of a mixer, paver, sprayer, and generator; all are used at construction sites. The Taxpayer also claims that this equipment was never used in Virginia.
DETERMINATION
Manufacturing Exemption
To qualify as an industrial manufacturer or processor, the Taxpayer must satisfy two tests: (1) a business must manufacture or process products for sale or resale, and (2) such production must be industrial in nature. See Title 23 of the Virginia Administrative Code ("VAC") 10-210-920. As track construction involves permanently affixing tangible personal property to realty, the Taxpayer is considered a real property service contractor, not an industrial manufacturer or processor. See 23 VAC 10-210-410(A).
As a real property service contractor, the Taxpayer is liable for the sales and use tax on all tangible personal property which it purchases for use or consumption in connection with its track construction contracts. It is my understanding that the Taxpayer does not sell its blended materials at wholesale or retail; i.e., it does not sell such materials to contractors or other persons without installation. Since the Taxpayer does not sell its track coating products without installation, it cannot be considered processing products "for sale or resale." Therefore, it does not satisfy the first test.
For a determination of whether a business is considered industrial in nature, Title 23 VAC 10-210-920 requires the business to be substantially similar to other businesses classified in manufacturing codes 20 through 39 of the Standard Industrial Classification ("SIC") Manual. However, the Taxpayer's real property activities are more appropriately classified under SIC codes 15 - 17, i.e., construction classifications.
Even under the North American Industry Classification System ("NAILS") which officially replaced the SIC Manual, the Taxpayer is not considered an industrial manufacturer. NAILS codes 31 through 33 are manufacturing codes. However, the Taxpayer's activities are most similar to those listed under NAILS code 23, a construction classification. Consequently, the Taxpayer does not satisfy the two tests for classification as an industrial manufacturer or processor and is therefore not entitled to the industrial manufacturing exemption set out by Code of Virginia § 58.1-609.3(2).
First Use
The Taxpayer also claims that the contested equipment is not subject to Virginia's retail sales and use tax since it was shipped to a Virginia location and then taken to Ohio and Tennessee for use. The Taxpayer maintains that this equipment was never used in Virginia.
Code of Virginia § 58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." (Emphasis added). The act of importing construction equipment into Virginia by a resident business of Virginia, no matter how temporary, is sufficient to cause a taxable "use" under the above definition.
Furthermore, as held by the Virginia Supreme Court in Commonwealth v. Pounding Mill Quarry Corp., 215 Va. 647, 212 S.E.2d 428 (1975) and Department of Taxation v. Miller-Morton Co., 220 Va. 852, 263 S.E.2d 413 (1980), the fact that property will ultimately be delivered outside Virginia is of no bearing if a taxable event occurs in Virginia. The taxable event in the Taxpayer's case is the initial delivery or first use of the contested equipment in Virginia.
Conclusion
Based on all of the foregoing, I find no basis upon which to revise the assessment which is proper as issued. Since the contested assessment has been paid, no further action is required.
If you have any questions about this response, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/28489R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of a sales and use tax audit assessment issued to **** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a contractor engaged solely in building athletic tracks. An audit for the period March 1997 through December 1999 resulted in the assessment of use tax on untaxed purchases of equipment shipped into Virginia and other tangible personal property used in its operations.
The Taxpayer takes exception to the use tax assessed on its track construction equipment and maintains that this equipment qualifies for the industrial manufacturing exemption set out by Code of Virginia § 58.1-609.3(2). The contested equipment consists of a mixer, paver, sprayer, and generator; all are used at construction sites. The Taxpayer also claims that this equipment was never used in Virginia.
DETERMINATION
Manufacturing Exemption
To qualify as an industrial manufacturer or processor, the Taxpayer must satisfy two tests: (1) a business must manufacture or process products for sale or resale, and (2) such production must be industrial in nature. See Title 23 of the Virginia Administrative Code ("VAC") 10-210-920. As track construction involves permanently affixing tangible personal property to realty, the Taxpayer is considered a real property service contractor, not an industrial manufacturer or processor. See 23 VAC 10-210-410(A).
As a real property service contractor, the Taxpayer is liable for the sales and use tax on all tangible personal property which it purchases for use or consumption in connection with its track construction contracts. It is my understanding that the Taxpayer does not sell its blended materials at wholesale or retail; i.e., it does not sell such materials to contractors or other persons without installation. Since the Taxpayer does not sell its track coating products without installation, it cannot be considered processing products "for sale or resale." Therefore, it does not satisfy the first test.
For a determination of whether a business is considered industrial in nature, Title 23 VAC 10-210-920 requires the business to be substantially similar to other businesses classified in manufacturing codes 20 through 39 of the Standard Industrial Classification ("SIC") Manual. However, the Taxpayer's real property activities are more appropriately classified under SIC codes 15 - 17, i.e., construction classifications.
Even under the North American Industry Classification System ("NAILS") which officially replaced the SIC Manual, the Taxpayer is not considered an industrial manufacturer. NAILS codes 31 through 33 are manufacturing codes. However, the Taxpayer's activities are most similar to those listed under NAILS code 23, a construction classification. Consequently, the Taxpayer does not satisfy the two tests for classification as an industrial manufacturer or processor and is therefore not entitled to the industrial manufacturing exemption set out by Code of Virginia § 58.1-609.3(2).
First Use
The Taxpayer also claims that the contested equipment is not subject to Virginia's retail sales and use tax since it was shipped to a Virginia location and then taken to Ohio and Tennessee for use. The Taxpayer maintains that this equipment was never used in Virginia.
Code of Virginia § 58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." (Emphasis added). The act of importing construction equipment into Virginia by a resident business of Virginia, no matter how temporary, is sufficient to cause a taxable "use" under the above definition.
Furthermore, as held by the Virginia Supreme Court in Commonwealth v. Pounding Mill Quarry Corp., 215 Va. 647, 212 S.E.2d 428 (1975) and Department of Taxation v. Miller-Morton Co., 220 Va. 852, 263 S.E.2d 413 (1980), the fact that property will ultimately be delivered outside Virginia is of no bearing if a taxable event occurs in Virginia. The taxable event in the Taxpayer's case is the initial delivery or first use of the contested equipment in Virginia.
Conclusion
Based on all of the foregoing, I find no basis upon which to revise the assessment which is proper as issued. Since the contested assessment has been paid, no further action is required.
If you have any questions about this response, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/28489R
Rulings of the Tax Commissioner