Tax Type
Motor Vehicle Fuel Sales Tax
Retail Sales and Use Tax
Description
Tax Treatment of Property and Supplies Used in Farming
Topic
Property Subject to Tax
Date Issued
06-15-2001
June 15, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you seek correction of the department's retail sales and use tax audit assessment issued to *****(the "Taxpayer"), for the period June 1993 through May 1999. Receipt is acknowledged of your payment of a portion of the deficiency in the amount of *****. I apologize for the delay in our response.
FACTS
The Taxpayer operates as a farming business growing vegetables for market. The Taxpayer also has labor camps in which housing is provided for the farm's employees, and which is partly subsidized by the Commonwealth. The Taxpayer contests the department's assessment of tax on motor vehicle fuels for use in off-road equipment used in its farming operations, purchases of propane used in agricultural activities and in the housing of its employees. The assessment also includes: (1) various invoices for items the Taxpayer contends are used in agricultural production, (2) invoices for items the Taxpayer claims were purchased and consumed in another state, and (3) invoices for which the Taxpayer claims the Virginia sales tax has been paid. Lastly, the Taxpayer contests the assessment of tax on invoices for real property improvements made by a licensed contractor.
DETERMINATION
Generally
Code of Virginia § 58.1-609.2(1) provides a sales and use tax exemption for the following:
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- Commercial feeds; seeds; plants; fertilizers; liming materials; breeding and other livestock; semen; breeding fees; baby chicks; turkey poults; rabbits; quail; llamas; bees; agricultural chemicals; fuel for drying or curing crops; baler twine; containers for fruit and vegetables; farm machinery; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor; and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production, which also includes beekeeping and fish, quail, rabbit and worm farming for market.
The intent of the above statute is to provide a sales and use tax exemption to a farmer who produces an agricultural product to be sold on the open market. Agriculture generally involves the cultivation of soil, production of crops, and raising of livestock. Exempt items must be purchased under a certificate of exemption.
Issues
I shall respond to the Taxpayer's issues on a record-by-record basis.
Propane for Agricultural Use (38)
The Taxpayer noted that this item was used for agricultural purposes and that a summary was attached explaining the Taxpayer's position. However, no such summary regarding this issue was found in the Taxpayer's data. If the Taxpayer can provide the necessary documentation to support its position, the department will consider the information presented.
Kerosene for Domestic Consumption (43, 44, 45, 56, 57, 59, 60, 61, 170, and 221 through 335)
Code of Virginia § 58.1-609.10(1), which is interpreted by Title 23 Virginia Administrative Code (VAC) 10-210-630, provides an exemption from sales and use tax for "[a]rtificial or propane gas, firewood, coal or home heating oil used for domestic consumption."
This section defines "domestic consumption" as the "use of artificial or propane gas, firewood, coal or home heating oil by an individual purchaser for other than business, commercial or industrial purposes."
In providing its interpretation, 23 VAC 10-210-630 restricts domestic consumption to fuels used by individuals. Purchases by groups or organizations will be subject to the tax unless the fuel purchased is for use by an individual. In this instance, the fuel is used by the Taxpayer in its employee housing. As such, the fuel is for the Taxpayer's use in its facilities and is not a purchase of fuel for domestic consumption. Additionally, comments by the auditor indicate that the propane at issue is not used in any function related to the drying or curing of crops. Accordingly, there is no cause for an adjustment of these purchases.
Repairs & Maintenance (51, 73, 75, 89, 90, 92, 96, 105, 108, 114, 115, 116, 117, 121, 122. 154. 155, 158, 164, 167, 171, 173, 204, 205, 206, and 207)
Comments by the auditor indicate that these tools, gloves, cans, repair parts, pipes, bearings, supplies, filters, hydraulic fittings, extinguishers, and other items were charged to a repairs and maintenance account (R&M) that is not identified as a farm equipment account. As these items are general maintenance tools and supplies not used in an exempt manner, they are properly included in the department's audit. For record 89, the gasoline has been adjusted from the audit, but the balance of the invoice is representative of R&M items that have been retained in the audit computations.
Out-of-State Purchase and Use (67)
The auditor's comments provide that no documentation has been furnished to support the Taxpayer's position that the item at issue was purchased and used in another state. The Taxpayer's records reflect that the item was charged to the Taxpayer's Virginia location. If the Taxpayer can provide shipping documents as requested in a letter by the department's auditor, I will consider such information in reviewing the taxable status of this transaction.
Real Property Improvements (70)
The contractor involved in this transaction is not a Virginia contractor. The auditor's comments indicate that, in previous discussions with a representative of the Taxpayer, it was stated that the Taxpayer's employees performed most of the work. However, the Taxpayer has yet to supply the contract for any additional review. Based on the fact that the Taxpayer's employees are performing most of the work related to this real property transaction, I am unable to find sufficient cause to allow for any adjustment. If the Taxpayer can supply the contract related to this record, the department's auditor will review it to determine if an adjustment is warranted. Absent such documentation, this item was correctly included in the audit.
Safety Apparel (71, 76, 78, and 79)
There is no exemption available under Code of Virginia § 58.1-609.2(1) or 23 VAC 10-210-50 for safety apparel. Such items are also not specifically listed under the wording of the exemption certificate. While the safety apparel may be considered tangible personal property, it cannot be considered a part of the agricultural production for market, as it protects the employee rather than the product.
Farm Equipment (72)
The auditor states that this item will be removed from the department's audit as it is used in the agricultural production of crops for market.
Sprayer Cartridges (74)
The auditor has noted that these are coded as farm supplies and should be removed from the audit.
Sprayer Cartridges and Spry Discs (77)
The auditor deleted these items. The balance of the invoice represents taxable items reflecting a total taxable amount of .
Parts for Irrigation System (80)
These items are tangible personal property necessary for use in agricultural production for market, and will be removed from the audit.
Propane (82 through 87)
The Taxpayer contends that the propane is purchased and used in another state. The auditor states that the propane was delivered to the Taxpayer's Virginia location with another state's tax erroneously charged.
The receipt of property in Virginia prior to any subsequent use or movement to another state constitutes first use in Virginia, and the item becomes subject to the Virginia use tax. I have enclosed a prior ruling, Public Document (P.D.) 93-53 (03/05/93), which further details the department's longstanding position. However, if the Taxpayer can provide any documentation to show that the items at issue were delivered to the Taxpayer in another state, I will consider removing them from the department's audit.
Off Road Diesel Fuel (88, 123 through 152, 179 through 200)
These records represent diesel fuel used in off-road farm equipment. Code of Virginia § 58.1-2259(18), copy enclosed, provides that fuels which are used in operating or propelling vehicles used exclusively for agricultural purposes and not operated on or over any highway for any purpose other than to move it in the manner and for the purpose mentioned, may be granted a refund of the amount of motor fuel taxes paid less one-half cent per gallon.
The application of the retail sales and use tax is addressed in Code of Virginia
§ 58.1-609.1(1), which provides that the tax shall not apply to:
-
- Fuels which are subject to the tax imposed by Chapter 22 (Code of Virginia § 58.1-2200 et seq.) of this title. Persons who are refunded any such fuel tax shall, however, be subject to the tax imposed by this chapter, unless such taxes would be specifically exempted pursuant to any provision of this section. (Emphasis added).
Code of Virginia § 58.1-609.2(1) specifically provides that the tax shall not apply to tangible personal property necessary for use in agricultural production for market. As the fuel is considered tangible personal property and its use is necessary in powering the farm equipment used in agricultural production for market, the department's audit will be adjusted to exclude these items.
Farm Supplies (93)
The auditor has made an adjustment for the Boston Lovejoy and the machetes totaling .
Gasoline (109)
This item will be removed from the audit.
Repair Parts for Packing House Refrigeration (111 & 112)
These items will be removed from the audit.
Repair to Tangible Personal Property (113)
The invoice presented to the auditor was for repair to tangible personal property. The vendor's invoice reflected a lump sum charge for repair and did not reflect any charge for the sales tax.
Code of Virginia § 58.1-625 provides that a dealer is required to separately state the amount of the tax from the sales price or charge. As the dealer did not separately state the taxes on the invoice, the auditor was correct in including the total charge in the audit. Subsequently, the vendor submitted a breakdown for the invoice reflecting sales tax on the materials cost of the invoice at issue. Such documentation is not acceptable. The actual invoice must be changed to reflect the proper allocation to sales tax and materials. However, I will allow for the removal of this invoice in this instance, as this is the Taxpayer's first audit. The Taxpayer is advised for the future that if its vendors' invoices do not reflect a separate charge for the sales tax, an audit by the department will subject such invoices to the sales tax on the lump sum charge, unless the Taxpayer can have the invoice correctly reissued.
Propane (159, 160, 219 & 220)
The auditor states that these invoices represent propane that is used in the drying of crops in accordance with the exemption provided by the Code of Virginia under § 58.1-609.2.1. Accordingly, these items will be removed.
Used in Farm Equipment (162)
The auditor states that tax was not assessed on the oil. Only the oil drums were included in the audit. No further adjustment required.
Virginia Sales Tax Paid (163, & 209)
These items will be removed from the audit.
Glue (168)
The auditor has stated that this item will be deleted from the audit.
Items Shipped to Another State (169)
The auditor has verified that these items were shipped to another state rather than the Taxpayer's Virginia location. These items will be deleted from the audit.
Parts for Stove (177)
The auditor states that this invoice reflects parts for a stove that is not used in agricultural production for market. Unless the Taxpayer can provide documentation to show that this item is used in such production, there is no basis to remove it from the audit.
Propane (336 & 337)
The auditor states that these invoices have been discussed with the Taxpayer who was in agreement with their taxable status. Thus, no adjustment is necessary for these items.
CONCLUSION
Based on all of the foregoing, there is basis for a revision of the department's audit assessment. However, any final revision will be delayed an additional 60 days to allow the Taxpayer additional time to submit documentation to support its request for exemption for those issues where additional documentation was requested in the above determination. The Taxpayer should contact ***** of the department's Office of Tax Policy at ******, once all of the information has been gathered. If such documentation is not made available within the time allotted, I will advise the auditor to revise the audit as stated herein, and to issue revised assessments.
If you should have any additional questions concerning this matter, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26909Q
COMMONWEALTH of VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner