04-69 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Supplier accepted exemption certificates in good faith from the purchasers

Topic

Appropriateness of Audit Methodology

Credits

Exemptions

Date Issued

08-24-2004

August 24, 2004

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 sales and use tax assessment issued to ********* (the "Taxpayer"), for the period January 1999 through September 2001. I apologize for the Department's delay in responding to your letter.

FACTS

The Taxpayer is a seller of greenhouse supplies. As a result of the Department's audit, the auditor assessed the tax on a number of sales in which the Taxpayer failed to charge the tax. The Taxpayer disputes the tax and contends that it accepted exemption certificates in good faith from the purchasers. Further, the Taxpayer contends that certain items taxed in the audit should qualify for the agricultural exemption in Va. Code § 58.1609.2(1).

DETERMINATION

Exemption Certificates

The proper use of certificates of exemption is set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-280, which states in Section B that "[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate."

In this case, the Taxpayer sells primarily to farmers, who are entitled to purchase items used in agricultural production for market exempt of the tax. Farmers must use Form ST-18. It is evident, however, that not all purchases by farmers are entitled to the agricultural exemption. Therefore, it is appropriate for the Taxpayer to query its customers in order to determine how the purchase will be used. Once this has been determined, the Taxpayer should apply the tax in accordance with the regulation in Title 23 VAC 10-210-50. The Tax Commissioner has previously addressed the proper acceptance of Form ST-18 when used by farmers in Public Document (P.D.) 95-33 (3/1/95).

Agricultural Exemption

- Virginia Code § 58.1-609.2(1) provides an exemption for the following:

- 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 at market. Title 23 VAC 10-210-50 interprets the exemption and sets forth the application of the tax to tangible personal property used in agricultural production for market. I will address the application of the tax to each of the contested items.

Greenhouse covers and locks: The regulation provides that the tax applies to structural construction materials, including greenhouses. The greenhouse covers and locks are affixed to a greenhouse. Given that these items are used in conjunction with a greenhouse, they are taxable.

Gloves and coveralls: These items are considered special purpose equipment and are used as protection when applying chemicals to plants. The statute or the regulation does not set out an exemption for safety apparel. In addition, such items are not specifically listed under the wording of Form ST-18. These items serve to protect a person, but not the agricultural product. Therefore, they are not used in agricultural production for market and are taxable. The Tax Commissioner has previously addressed safety apparel in regard to the agricultural exemption in P.D. 01-81 (6/15/01).

Hole punch: This item is used for punching holes in irrigation materials for watering. The regulation states that the tax does not apply to irrigation lines and sprinkler heads. While this item may be used in connection with irrigation materials, it is not among the exempt items provided in the statute or the regulation and is not used in agricultural production for market. Therefore, this item is taxable.

Ground cover/stapler/jute staples: The ground cover is used in place of chemicals or fertilizers in fields to prevent weed growth and to improve the aesthetic appearance of nurseries. The stapler is used to apply the jute staples that hold down the ground cover. While the ground cover may function in place of such exempt products as the fertilizers and agricultural chemicals, the ground cover, stapler and jute staples are not listed as exempt items in the statute or regulation. As such, these items are not used in agricultural production for market and are taxable.

The "ground cover" in this instance is distinguishable from "ground covering" that functions like "shade cloth" is used to protect plants from the winter weather and is exempt in accordance with the regulation. The Tax Commissioner has previously determined in P.D. 96-68 (4/26/96) that "ground covering" that has the same function as "shade cloth" is used in agricultural production for market and is exempt. The information available indicates that the ground cover at issue in this case does not serve a similar function. Accordingly, the agricultural exemption is not available.

CONCLUSION

Although you believe that the contested items should qualify for exemption, they do not fall within the scope of the agricultural exemption as set out in Va. Code § 58.1-609.2(1) and Title 23 VAC 10-210-50. As such, there is no basis to remove the contested items from the audit, except the sale of the drill bit that is entered twice. The audit will be adjusted to remove one of the entries.

You indicate that the Taxpayer has changed its processes to apply the tax to the contested items, but that its customers continue to question the application of the tax. If the Taxpayer's customers continue to have questions after the issuance of this letter, you may refer them to ***** in the Office of Policy Administration, Appeals and Rulings,
at *****.

The Code of Virginia section, 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.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/39340J

Rulings of the Tax Commissioner