04-133 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Industrial waste management

Topic

Assessment

Manufacturing Exemption

Penalties and Interest

Date Issued

09-16-2004

September 16, 2004

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period January 2001 through December 2003.

FACTS

The Taxpayer provides environmental services to its customers. Its main focus is industrial waste management. The Taxpayer cleans up hazardous waste and spills. An audit by the Department resulted in the assessment of tax, interest and penalty. The Taxpayer contends that the assessment is erroneous and raises a number of issues in support of its position.

DETERMINATION

Out-of-State Purchases

The Taxpayer states that it purchased items outside Virginia and paid sales tax to another state. The Taxpayer contends it is not appropriate to be assessed use tax on the same items on which sales tax was paid, particularly when Virginia does not allow a credit for the sales tax paid to another state.

Virginia Code § 58.1-604 provides that a use tax is imposed on the use or consumption of tangible personal property in the Commonwealth. Virginia Code § 58.1602 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."

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-6030(A), the use tax applies "to the use, consumption, or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased."

In this instance, the Taxpayer purchased tangible personal property from an out-of-state dealer for use and consumption in Virginia. While the Taxpayer paid sales tax to the out-of-state dealer for these items, the items were delivered to the Taxpayer in Virginia for use in Virginia. In accordance with Va. Code § 58.1-604, the Taxpayer is liable for the use tax on these purchases of tangible personal property. First use of the property occurred in Virginia. The imposition of the tax was triggered at the moment of first use.

You maintain that the items at issue should be removed from the assessment because the Taxpayer is unable to receive a credit for the sales tax paid to another state. Title 23 Virginia Administrative Code 10-210-450(A) provides that a credit against the Virginia use tax is granted when tangible personal property is purchased in another state and the sales or use tax is paid to such state. The credit does not apply, however, when the tax is erroneously charged or incorrectly paid to another state. As stated in the regulation, "if a person purchases and takes delivery in Virginia of tangible personal property from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available." In such an instance, the taxpayer must apply to the out-of-state dealer for a refund.

The Taxpayer's situation is clearly addressed in the regulation. In this case, the use tax is properly due and payable to Virginia. The out-of-state dealer incorrectly charged sales tax on items purchased for delivery to Virginia. Accordingly, the use tax assessment is correct.

Manufacturing Exemption

The Taxpayer asserts that the auditor assessed tax on chemicals it purchased for use in manufacturing. The Taxpayer believes the chemicals qualify for the manufacturing exemption contained in Va. Code § 58.1-609.3(2) and should be removed from the assessment

Title 23 Virginia Administrative Code (VAC) 10-210-920(A) interprets the manufacturing exemption and explains that for a business to obtain the manufacturing exemption, it must be manufacturing or processing products for sale or resale, and such production must be industrial in nature. The types of tangible personal property that may be purchased exempt of the tax are machinery and tools, raw materials or other types specifically set forth in this regulation. Finally, the tangible personal property must be used directly in a manufacturing or processing operation to qualify for exemption.

You maintain that the chemicals used by the Taxpayer in the performance of its services are exempt from the tax. The Taxpayer in this instance provides industrial waste clean up services for its customers. The activities performed by the Taxpayer do not amount to that of an industrial manufacturer or processor as provided for in Title 23 VAC 10-210-920. The chemicals used by the Taxpayer in providing services to its customers do not qualify for the manufacturing exemption. Accordingly, the assessment is correct.

Amnesty Penalty

Based on the information provided and the fact that the Taxpayer was not given notice of the Virginia Amnesty Program, I will agree to waive the amnesty penalty.

Compliance Penalty

Pursuant to Va. Code § 58.1-635, the application of penalty to audit deficiencies is mandatory. Title 23 VAC 10-210-2032 interprets this Code section and provides that the application of penalty is based upon the percentage of compliance determined by computing the taxpayer's compliance ratio. For third and subsequent generation audits, the penalty will generally be applied unless the taxpayer's compliance ratios meet or exceed 85 percent for sales tax and 85 percent for use tax.

This is a third generation audit for the Taxpayer. The Taxpayer's use tax compliance ratio is 1 percent. Accordingly, the auditor properly assessed the penalty. You maintain that the penalty should be abated because the Taxpayer has a combined sales and use tax compliance ratio of 99 percent. When considering whether a compliance penalty is warranted, a taxpayer's sales tax compliance and use tax compliance are considered separately. The fact that the Taxpayer in this case has a combined compliance ratio of 99 percent is of no consequence. The use tax compliance penalty was correctly assessed because the Taxpayer did not meet the use tax compliance ratio required for a third generation audit. Accordingly, the penalty will not be abated.

Conclusion

Based on this determination, the amnesty penalty will be removed from the assessment. In all other respects, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within thirty days of the date of the updated bill.

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line 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 about this response, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/49856P

Rulings of the Tax Commissioner