Document Number
04-25
Tax Type
Retail Sales and Use Tax
Description
Items used directly in the rendition of the Taxpayer's public utility service
Topic
Credits
Exemptions
Penalties and Interest
Taxpayers' Remedies
Date Issued
06-02-2004

June 2, 2004





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


Dear *************:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ************ (the "Taxpayer") for the period September 1996 through August 1999. I apologize for the delay in the Department's response.
FACTS

The Taxpayer is a state-regulated public utility engaged in the business of providing electrical power to Virginia customers. The Taxpayer contests a number of assessed items and maintains such items are used directly in the rendition of its public service pursuant to Va. Code § 58.1-609.3(3). In addition, the Taxpayer seeks credit in the audit for tax erroneously paid to vendors on exempt items.
DETERMINATION

Virginia Code § 58.1-609.3(3) provides an exemption from the sales and use tax for "[t]angible personal property sold or leased to a public service corporation subject to a state franchise or license tax upon gross receipts, for use or consumption ...directly in the rendition of its public service...." (Emphasis added). While the statute does not specifically define the word "directly," the Virginia Supreme Court has narrowly applied the exemption. In Commonwealth v. Community Motor Bus Co., 214 Va. 155, 198 S.E. 2d (1973), the Court held that the legislature, in using the phrase "directly in the rendition of its public service" intended to narrow the scope of the exemption and exempt only such essential tangible personal property used immediately and principally by public service corporations.

Title 23 of the Virginia Administrative Code (VAC) 10-210-3020 further provides that "items of tangible personal property that are used directly in the rendition of a public utility service are those which are both indispensable to the actual provision of a utility service and used or consumed immediately in the performance of such service. The fact that a particular item may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in the rendition of a public service." (Emphasis added).

Keeping the above in mind, I will address the issues raised in your letter.

Testing Rubber Hoses and Blankets

These items are used to test the integrity of exempt insulating hoses and blankets. While the insulating hoses and blankets qualify for exemption, the Department does not consider the testing of such hoses and blankets as being used in the maintenance of equipment used directly in the rendition of a utility's public service.

Title 23 VAC 10-210-3020(G) specifically addresses repairs to transmission and distribution systems and provides that "tangible personal property, including equipment, machinery, tools, repair parts, and supplies ...are exempt from the tax when used to keep a utility's transmission and distribution systems in operation or repair."

As noted in the regulation, only tangible personal property used to keep a utility's transmission or distribution system in operation or repair is exempt from the tax. Unlike the insulated hoses and blankets, which are themselves used to repair and maintain exempt transmission and distribution lines, the property used in the testing of maintenance equipment is not used directly in the utility's public service. Accordingly, the property used in testing the rubber hoses and blankets is taxable.

Guy Assemblies

Guy assemblies are used to brace wooden poles that support the distribution lines carrying the electricity. The Taxpayer maintains that the guy assemblies are used directly in the rendition of the public utility and are exempt.

This issue was addressed in Public Document (P. D.) 99-65 (4/15/99). In that ruling, the Department determined that while guy assemblies were "essential to the operation of the utility service, they are not used directly in the rendition of electricity and, therefore, are taxable." The poles are used directly because they support the distribution lines. Hence, the poles are exempt. The guy assemblies help to support the poles and are, therefore, only used indirectly. Under the guidelines established in Community Motor Bus Co., the guy assemblies are not used immediately for the transmission and distribution of electricity. Accordingly, I find no basis to change the Department's position on this issue.

Truck Grounds

These items are tools used to ground an aerial bucket truck to the grounded components of the electric distribution system. The truck grounds allow employees to safely perform maintenance and repairs on energized power lines while working from the aerial bucket mounted on the truck.

Truck grounds do not qualify for exemption because they are not used directly in the operation or repair of the Taxpayers' transmission system. However, Title 23 VAC 10-210-3020(C) does provide an exemption for vehicles and their equipment used to keep a utility's transmission and distribution system in operation or repair. This provision would exempt truck grounds purchased as a component of the vehicle even though they would not be exempt if purchased separately.

Ground Rods and Ground Plates

The entire length of the electric distribution system is grounded by a continuously connected conductor that is attached to ground rods that are driven into the earth and to copper ground plates that are attached to the bottoms of poles before the pole is placed in the ground.

According to the auditor, ground rods and ground plates are used to protect the distribution lines in the event lighting strikes by conducting the lightning to the ground. In P. D. 00-57 (4/26/00), the Tax Commissioner ruled that lightning arrestors used to protect the power supply from lightning strikes are not an immediate part of the production process and are taxable. The Department's position is that the ground rods and ground plates serve the same function as lightning arrestors and are taxable.

Cable Ties and Cable Coding Tape

Repairs to the distribution lines require that a utility worker be able to determine the source and route of each wire before repairs can occur. The cable ties and coding tape are used to identify and code such wires. While the cable ties and coding tape are necessary to identify and code the wires, they do not qualify for exemption because they are not an immediate part of the repair function. Rather, these contested items precede the repair activity.

Disconnect Sleeves

When utility service is disconnected, disconnect sleeves are placed on the back of the meter to provide an insulating barrier between the utility's electric distribution system and the equipment of the property owner by stopping the flow of electricity to the customer.

While the disconnect sleeves are necessary, they are not used immediately in the transmission or distribution of electricity to the public. Nor are they used to keep a utility's transmission or distribution system in operation or repair. Accordingly, the auditor correctly assessed the tax on disconnect sleeves.

Hot Stick Cleaner

This item is used to clean the hot stick in order to maintain its insulating qualities. The hot stick is an insulated tool used to perform maintenance on the energized distribution system. Because it is used directly to maintain the electrical distribution system, the hot stick itself is an exempt article. You maintain that just as repairs to maintain exempt property is exempt, the maintenance of the hot stick should likewise be classified as exempt. In addition, you maintain that the cleaner also performs a safety function, as it is used to clean the hot stick to avoid electrocution of the utility workers. The Taxpayer believes that the cleaner is analogous to the methanometers and first aid supplies that were found to be exempt as "protective materials" in the Virginia Supreme Court case Commonwealth v. Wellmore Coal Corporation, 228 Va. 149, 320 S.E.2d 509 (1984).

While the hot stick qualifies for exemption, the Department does not consider the maintenance of the hot stick as being used in the maintenance of equipment used directly in the rendition of a utility's public service. Therefore, the hot stick cleaner, which maintains a maintenance device, is taxable.

Further, Title 23 VAC 10-210-3020 provides that safety equipment is taxable except for protective clothing worn by electric utility production, transmission, or distribution plant employees at a public utility.

In Commonwealth v. Wellmore Coal, the Virginia Supreme Court determined that methanometers and first aid supplies used directly in the actual mining and production process were exempt from the sales and use tax. In this case, the cleaner is not used directly in the production, transmission, or distribution of electricity and would not qualify for the exemption based on the strict construction of the law.

Meter Socket Covers

Meter socket covers are used to cover the empty socket hole once a meter is removed from the meter box. Unlike meter covers that qualify for exemption because they are used to repair exempt meters, meter socket covers are used only to prevent damage to the meter socket once the meter is removed. Accordingly, the meter socket covers do not qualify for exemption because they are not used immediately in the transmission or distribution of electricity nor are they used to repair equipment used directly in the rendition of the utility's public service.

Parts for Hydraulic Tool Punch

These items are parts used to repair the hydraulic tool punch. The hydraulic tool punch is used to punch holes in metal cabinets for installation of conductors or when a metal cabinet must be repaired or altered.

As noted above, the regulation does not provide an exemption for tangible personal property used to maintain and repair equipment that is not used directly in the rendition of the utility's public service. Based on the description of the hydraulic tool punch, it does not qualify for exemption because it is not used immediately in the transmission or distribution of electricity nor is it used to repair equipment used directly in the rendition of the utility's public service. Likewise, the parts for the hydraulic tool punch do not qualify for exemption.

Meter Base Stands

According to the auditor, the meter base stands are devices used to support a row of meters. The meter base stands are freestanding and not attached to reality. The Taxpayer believes that the meter stands are a component part of the exempt utility machinery. The Taxpayer cites P. D. 87-276 to support its claim that the meter base stands are exempt from the tax.

The Department ruled in P. D. 87-276 that while the manufacturing and processing regulation set out in Title 23 VAC 10-210-410 (formally VR 630-10-63(C)(2)) does not have a direct application to public utilities, the principles set forth in this regulation would be applicable to the electric utility accounts relating to foundations. In that ruling, the Commissioner determined that meter stands are a component part of exempt utility machinery and exempt from the tax when the meter stands are not affixed to realty.

Meter stands are taxable because they do not meet this "used directly" test. The meters themselves do qualify for exemption. Thus, although the meter stands are not exempt on their own, the exemption for meters will be extended to the meter stands when the meter and meter stands are purchased as a complete unit.

Property used directly in the rendition of a utility service

The auditors assessed the tax on certain property because they were unable to determine the specific use of the items at the time of the audit. Based on the Taxpayer's description of the purpose of the property, I find that the following items qualify for exemption and will be removed from the audit.
    • Meter Covers
      Insulating Blankets
      Cable Cleaner
      Blades for Cable Stripper (prorated at 50% exempt use)
      Fiberglass Pike Pole
      Line Arrestors
      Fuse/Arrestor Combination
      Plastic Tape (used to wrap and insulate energized components of equipment) Mesh Wire Grip

Taxes erroneously paid to vendors

The Taxpayer claims it paid sales tax to vendors on exempt items; however, the auditor did not give credit in the audit for such erroneously paid taxes.

The Department has addressed the issue of taxes erroneously paid to vendors in P. D. 96-358 (12/6/96). In that ruling, the Department denied credit in the audit for taxes the taxpayer erroneously paid to its vendors. The Department stated that refunds of this nature are not included as credits in audit findings to prevent misallocations of the 1% local sales tax. Thus, the taxpayer was advised to seek a refund for the erroneously paid sales tax from its vendors. Based on that ruling, the auditor was correct in not allowing credit in the audit for taxes that the Taxpayer erroneously paid to vendors. Further, it is my understanding that the auditor previously advised the Taxpayer that it would have to seek refunds from its vendors.

Summary

The audit will be revised to remove the tax, penalty, and interest assessed on items used directly in the rendition of the Taxpayer's public utility service. A refund based on the revised audit will be issued shortly.

The Code of Virginia sections, regulations and public documents cited 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 determination, you may contact ********************* in the Department's Office of Policy and Administration, Appeals and Rulings, at **************.

                • Sincerely,


                • Kenneth W. Thorson
                    • Tax Commissioner



AR/27095T

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46