Tax Type
Retail Sales and Use Tax
Description
Mining company purchase of safety equipment
Topic
Assessment
Exemptions
Penalties and Interest
Date Issued
08-25-2004
August 25, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer") concerning the retail sales and use tax assessment for the audit period of July 2000 through June 2003. You request that the tax assessed on the purchase of safety items be abated and that the penalty assessed be abated.
FACTS
The Taxpayer is a mining company that produces coal from an underground mine. The Taxpayer was assessed tax and penalty with regard to the purchase of safety items. The Taxpayer contends that the purchase of these items should be exempt of the tax because the Taxpayer is required to have these items for the safe operation of its mining business. The Taxpayer maintains that the Commonwealth's regulation that relates to mining operations is too narrow in its scope with regard to items covered by the exemption. The Taxpayer further contends that the penalties applied should be abated because the Taxpayer has undergone a complete rearrangement of its administrative staff. This is a seventh generation audit for the Taxpayer.
DETERMINATION
Exemption for Purchase of Safety Items
Title 23 of the Virginia Administrative Code (VAC) 10-210-6030 provides that 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.
23 VAC 10-210-960 provides that items used directly in mining and processing are exempt of the retail sales and use tax. The term "used directly" refers to those activities, which are an integral part of the production of a product including all steps of an integrated process. It further provides that although particular property may be considered essential to the conduct of the business of mining or mineral processing because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly. Purchases of protective apparel can be made exempt of the tax.
In this instance, the Taxpayer has purchased reflective tags, reflective signs, strobe lights and safety nets for use in its mining business. The Taxpayer contends that these items are required by federal and state law for the purpose of safely operating its mining business. Pursuant to 23 VAC 10-210-960, the fact that the Taxpayer is required by federal or state law to incorporate these items in its safety plan, does not mean that the property is used directly in mining operations. However, I find that the reflective tags that are attached to the clothing and hardhats worn by miners constitute exempt protective apparel. Accordingly, these items will be removed from the assessment. The other safety items at issue are not deemed exempt by 23 VAC 10210-960. Accordingly, pursuant to 23 VAC 10-210-6030, the use tax applies to these items where the sales tax was not remitted at the point of purchase.
Penalty Waiver
Pursuant to Va. Code § 58.1-635 and 23 VAC 10-210-2030, a dealer who fails to file a return and pay the full amount of tax by the required due date is subject to a penalty.
23 VAC 10-210-2032 provides that the application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio. With regard to third and subsequent generation audits, the penalty will generally be applied unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax.
In Public Document (P. D.) 00-115 (6/23/00), the taxpayer sought a waiver of penalty assessed following a retail sales and use tax audit. During the audit period at issue, the taxpayer underwent a restructuring of its systems and procedures. The taxpayer experienced many changes, including high employee turnover and the loss of procedures to ensure sales and use tax compliance. The Department ruled that corporate restructuring and employee turnover are considered normal business conditions, which are generally within a taxpayer's control and a consequence of a taxpayer's efforts and actions. The circumstances cited by the taxpayer in that instance were not considered unusual. Rather, the Department ruled that they reflected common business conditions. Accordingly, the Department did not find a basis to waive the penalty.
In Public Document 97-31 (1/31/97), the Department ruled that a penalty will be waived when there is evidence of exceptional mitigating circumstances. The Department does not view turnover or changes in personnel or vendor changes to constitute exceptional mitigating circumstances. In that instance, where the taxpayer had worked diligently in reporting and timely filing its returns and taking corrective action to avoid future errors, the Department found that in the absence of exceptional mitigating circumstances, there was no basis to waive the penalty.
In this instance, the Taxpayer maintains that it has undergone a complete rearrangement of its administrative staff in the last two years. The Taxpayer contends that as a result of this change, clerical errors were made with regard to its sales and use tax records. Pursuant to P. D. 00-115 and P. D. 97-31, the Taxpayer's rearrangement of its administrative staff is considered a normal business condition that does not constitute exceptional mitigating circumstances. Additionally, this is a seventh generation audit, and the Taxpayer's use tax compliance ratio is 58%. Accordingly, there is currently no basis to waive the penalty. However, the compliance ratio will be reviewed upon the revision of the protective apparel discussed above.
Based on this determination, the audit will be returned to the audit staff to remove the reflective tags from the assessment. The other contested items will remain in the assessment, and an updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within thirty days of the date of this letter.
The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy 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 *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/48782P
Rulings of the Tax Commissioner