Tax Type
Retail Sales and Use Tax
Description
Mining and producing natural gas; Exemptions
Topic
Appropriateness of Audit Methodology
Penalties and Interest
Property Subject to Tax
Subtractions and Exclusions
Date Issued
04-08-2002
April 8, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period March 1997 through February 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of mining and producing natural gas. The Taxpayer disputes two items assessed in the department's retail sales and use tax audit.
First, the Taxpayer operates an electrical substation that is used to step down the voltage of the electricity purchased from a public service company. This substation provides electricity through private lines to the Taxpayer's mine sites (gas wells). The auditor allowed an exemption for electrical equipment and electricity used at the mine site but held the lines used in the transmission of the electricity to the mine site taxable. The Taxpayer believes the lines used to transmit the electricity from the substation to the mine site should be tax-exempt. The Taxpayer bases its position on Public Document (P.D.) 94-247 (8/12/94).
The second area of contention involves the purchase of stone used by the Taxpayer to control erosion at the substation and for reclamation of the mine site and access roads to the mine site. The auditor assessed tax on 100% of the rock used at the substation, and prorated the rock used in reclamation at 60% exempt (reclamation of mine site) and 40% taxable (reclamation of access roads). The Taxpayer believes the rock used at the substation for erosion purposes and the rock used to reclaim access roads is exempt.
DETERMINATION
Code of Virginia § 58.1-609.3(12) provides an exemption from the retail sales and use tax for "raw materials, fuel, power, energy, supplies, machinery or tools or repair parts therefor or replacements thereof, used directly in the drilling, extraction, refining, or processing of natural gas or oil and the reclamation of the well area." In addition, Code of Virginia § 58.1-609.3(9) provides an exemption for "certified pollution control and facilities as defined in § 59.1-3660 and which, in accordance with such section, has been certified by the Department of Mines, Minerals and Energy for coal, oil and gas production, including gas, natural gas, and coalbed methane gas."
Transmission of electricity
The Taxpayer believes that the transmission of electricity from the substation to the well site qualifies as an exempt transportation system as set forth in P.D. 94-247, and supported by Title 23 of the Virginia Administrative Code (VAC) 10-210-960 (formerly VR 630-10-65.1).
P.D. 94-247 and the cited regulation specifically refer to the transportation of mined minerals, ore or gas for further processing by the mine operator, provided the processing plant is owned by the mine operator. The transportation system in the present case is used strictly for the transmission of electricity from the substation plant to the well site. There is no exemption available for the transportation of an exempt power source. Furthermore, the transmission lines are not "used directly in the drilling, extraction, refining or processing" of the natural gas. For these reasons, I find that the power lines from the substation to the well site do not qualify for the exemption set out in Code of Virginia § 58.1-609.3(12) and were correctly held taxable in the audit.
Rock used in reclamation
In regard to the rock, the statute is clear that the exemption for reclamation activities is restricted to reclaiming at the mine site. This position is further substantiated in Title 23 VAC 10-210-960.A(3)h, which addresses reclamation and provides that "reclamation is the restoration or conversion of mined land to a stable condition and the ongoing restoration or conversion of land currently mined prior to total site reclamation." (Emphasis added). It has been the department's longstanding policy that exempt reclamation activities are limited to the mine site or land previously mined. The exemption does not extend to the reclaiming of access roads, nor does it extend to reclamation activities that are required by state or federal regulations on land other than the mine site or land previously mined. Therefore, the rock used to reclaim access roads and to reduce erosion activity at the substation were correctly held taxable in the audit.
Based on the above, there is no basis to adjust the audit assessment. Please remit a check in the amount of ***** to the department's Office of Policy and Administration, Policy Development, P.O. Box 1880, Richmond, Virginia 23218-1880, Attention: *****. Payment should be made within 30 days from the date of this letter. If payment is not received within the allotted time, interest will accrue on the outstanding balance and collection action will resume.
Copies of the regulation and public document cited are included for reference purposes. These and other reference documents are also available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.
If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/32726K
Rulings of the Tax Commissioner