Tax Type
Retail Sales and Use Tax
Description
Tangible personal property used or consumed in the operation of business
Topic
Accounting Periods and Methods
Date Issued
03-11-2005
March 11, 2005
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") as a result of an audit for the period June 1997 through May 2000. I apologize for the delay in responding to
your letter.
FACTS
The Taxpayer is in the excavation and hauling business. As part of that business, the Taxpayer also sells dirt. The Taxpayer has been assessed tax on its sales of dirt and on tangible personal property used or consumed in the operation of its business. The Taxpayer contests most of the audit findings.
In regard to the dirt sales held in the audit, you indicate that they are exempt because they "are used in the rendition of the [Taxpayer's] common carrier service."
In regard to the assessed purchases, you concede that a small portion is taxable. As for the remaining purchases held in the audit, you maintain that they are exempt from the retail sales and use tax based on the exemption at Va. Code § 58.1-609.3 3, as it existed during the audit period.
DETERMINATION
During the audit period at issue, Va. Code § 58.1-609.3 3 provided an exemption from the retail sales and use tax for:
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- tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railway, for use or consumption by such common carrier directly in the rendition of its public service. [Emphasis added.]
Although the above exemption applies to tangible personal property sold to a public service corporation, it does not extend to sales made by a public service corporation. In this regard, the dirt sales made by a public service corporation are not granted an exemption from the tax under Va. Code § 58.1-609.3 3.
Thus, even if the Taxpayer were deemed a public service corporation, its dirt sales do not qualify for exemption under Va. Code § 58.1-609.3 3. Furthermore, the sale of dirt is generally taxable. Accordingly, absent evidence that the dirt was sold to customers who are exempt from the retail sales and use tax, the contested dirt sales are taxable.
Contested purchases
In regard to the contested purchases, the issue involves a determination whether the Taxpayer is a common carrier of property for purposes of the exemption set out by Va. Code § 58.1-609.3 3, as it existed during the audit period. Interpreting this statute, Title 23 of the Virginia Administrative Code 10-210-370 A states, "A common carrier must be authorized to operate under a certificate of convenience and necessity issued by the State Corporation Commission [SCC] or the Interstate Commerce Commission [ICC] in order to qualify for this exemption." Because of deregulation of the trucking industry, there is no longer any SCC or ICC authorization available for determining whether a carrier of property by motor vehicle is a common carrier. Therefore, the terminology of the Department's regulation is no longer applicable, and we must analyze the wording of the statute to determine if the exemption is available.
To qualify for the exemption in Va. Code § 58.1-609.3 3, an entity must be a public service corporation. Virginia Code § 56-1 defines the term "public service corporation" to include:
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- gas, pipeline, electric light, heat, power and water supply companies, sewer companies, telephone companies, telegraph companies, and all persons authorized to transport passengers or property as a common carrier. [Emphasis added.]
This definition incorporates a requirement for the Taxpayer to be "authorized" to provide the service (transport property as a common carrier) in order to be deemed a public service corporation.
As previously mentioned, because of deregulation of the trucking industry, during the audit period the Taxpayer could not obtain SCC or ICC authorization as a common carrier of property by motor vehicle. In fact, you indicate in your correspondence that the Taxpayer "did not previously hold a Certificate as a common carrier with the ICC (Interstate Commerce Commission) or the SCC (State Corporation Commission)." Without such authorization, the Taxpayer is not considered a public service corporation and, therefore, does not qualify for the exemption under Va. Code § 58.1-609.3 3.
The rationale behind exempting public service corporations (including common carriers) is that they perform a necessary service for the public good. Historically, the rates the public service corporations could charge were regulated by the SCC to provide the citizens of Virginia the needed services at a fair price. The public service corporation exemption reduces the final cost of the service, thereby assuring that the necessary level of services are available while allowing the providers a reasonable return on investment.
Deregulation of various industries, including the trucking industry, has led to the situation where rates are not controlled or set by government agencies. Carriers of property by motor vehicle that are not regulated are free to charge what the market will bear in a fully competitive environment, and the original rationale for the exemption no longer exists.
You state that the Taxpayer registered with the United States Department of Transportation's Federal Motor Carrier Safety Administration (the FMCSA). You contend that this registration provides the authorization for the Taxpayer to transport property as a common carrier; therefore, you suggest, the Taxpayer falls within the definition of a public service corporation.
A review of the registration requirements with the FMCSA and the Federal Motor Carrier Safety Regulations reveals the "authorization" and "regulation" under the FMCSA do not rise to the levels associated with the rationale behind the public service corporation exemption. First, the "common carrier" designation pursuant to registration is self-declared. The FMCSA does not make a determination regarding an applicant's status. Second, the Federal Motor Carrier Safety Regulations do not establish rates for common carrier services. Motor carriers remain free to set their own rates and compete with other carriers for business.
Even if the Department were to accept your position that registration with the FMCSA provides the necessary authorization to be considered a public service corporation as defined in Va. Code § 56-1, you state in your correspondence that the Taxpayer's registration was granted by the FMCSA on February 15, 2001, and the registration was not retroactive. Based on this information, the Taxpayer was not registered by the FMCSA until nine months following the end of the audit period.
Therefore, the Taxpayer did not hold any authorization that would qualify it as a public service corporation for the audit period at issue. Because the Taxpayer was not considered a public service corporation during the audit period, it did not qualify for the exemption in Va. Code § 58.1-609.3 3 for the purchases assessed in the audit.
Repeal of exemption
I note for subsequent periods that House Bill 5018 (Chapter 3, 2004 Special Session I) eliminated the retail sales and use tax exemptions for certain public service corporations, including common carriers of property by motor vehicle. The repeal became effective September 1, 2004.
CONCLUSION
The law existing during the audit period does not support the Taxpayer's arguments. To the extent the Taxpayer is making a good faith argument for the extension, modification, or reversal of existing law, it is not the prerogative of the Tax Commissioner to make such an extension, modification or reversal in this case.
Based on this determination, the assessment is correct. An updated bill, with interest accrued through 120 days following the date of the Taxpayer's original appeal letter, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty. See the enclosure entitled "Important Payment Information."
The Code of Virginia sections and regulations cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.policylibary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals
` Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/41686R
Rulings of the Tax Commissioner