06-73 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Using and consuming contractor, live haul poultry containers

Topic

Assessment

Basis of Tax

Exemptions

Date Issued

08-18-2006

August 18, 2006

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 retail sales and use tax assessments issued to ***** (the "Taxpayer") for the period May 1998 through September 2001. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a producer of processed chickens. The Taxpayer contracts with growers to house and feed chickens owned by the Taxpayer. The Taxpayer provides feed, vaccinations, veterinary assistance and financial assistance to the growers. The Taxpayer owns a feed mill and hatchery to support its growing operation and provides delivery of both feed and chicks in its own trucks to farms, where the chicks grow to maturity. The Taxpayer also uses its own trucks to transport mature chickens from the farm to its processing plant.

The Department's audit resulted in the assessment of tax on live haul poultry containers used by the Taxpayer to transport mature chickens from the farms to the processing facility. The Taxpayer contends that the live haul poultry containers qualify for the agricultural exemption found in Va. Code § 58.1-609.2 1. Tax was also assessed on the fabrication charges for catwalks and stairs installed on the exterior of one of the Taxpayer's processing plants. The Taxpayer contends that the tax applied to the fabrication charges is in error, and the fabricator should be considered a using and consuming contractor subject to the tax on all materials used in fabricating the catwalks
and stairs.

DETERMINATION

Live Haul Poultry Containers

Virginia Code § 58.1-609.2 1 provides an exemption from the retail sales and use tax for:

- Commercial feeds; . . . breeding and other livestock; . . . baby chicks; turkey poults; . . . quail; . . . agricultural chemicals; . . . farm machinery; . . . and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production .... for market.

The Taxpayer contends that in a letter ruling from the Department's Technical Assistance Unit dated September 17, 1985, the live haul containers were determined to be exempt under the agricultural exemption. The letter states that the exemption applies to the containers because the agricultural exemption exempts packaging materials. The response was in error, in that the chickens were not packaged for sale, but were placed in containers for shipment to that taxpayer's processing facility, where the chickens would be processed for market. The policy set forth in the 1985 letter was rescinded in Public Document (P.D.) 94-330 (11/02/94), which clearly explains the application of the tax to live haul poultry containers. Further, the Taxpayer was informed of the proper application of the tax in a letter from the Department dated February 10, 1993.

The Taxpayer also contends that the integrity of the chickens produced by the Taxpayer are protected when transported to the processing facility to the same extent that P.D. 98-8 (1/19/98) applies the agricultural exemption to a poult transport system. In that document, the taxpayer used a customized container system to transport baby turkey poults from its hatchery to its farm site where the poults were grown to maturity, at which time they would be ready for transport to the taxpayer's processing facility. In that instance, agricultural production continues from the hatchery to the farm until the poults become mature turkeys. The customized container system was specially constructed to regulate the temperature of day-old turkey poults, which would perish if transported to the farm in normal open-air live haul containers.

In the Taxpayer's situation, the chickens reach maturity prior to being transported in the live haul poultry containers. Production of an agricultural commodity has ended, and the chickens are ready for transport. While the live haul containers do provide some protection for the chickens, such protection is for transport purposes, which is outside the scope of the agricultural exemption.

The Taxpayer further contends that the containers qualify for the manufacturing and processing exemption under Va. Code § 58.1-609.3 as part of the handling and storage of raw materials at the plant site. I do not agree. The containers are taken from the truck bed by forklift to the beginning of the processing line, where the containers are tilted and the chickens are released by sliding into the processing facility's dumper cage. The chickens are then released into the live bird receiving area to begin actual processing. The function of live haul poultry containers in transporting the chickens to the processing facility is a step removed from the actual production process and does not meet the direct use standard in Va. Code § 58.1-609.3 2.

The Department's policy with respect to exemptions from the sales and use tax is dictated by the rule of strict construction established by the Virginia courts. The Virginia Supreme Court has consistently held that exemption from taxation is the exception. That is, where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See, for example, Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).

Based on the foregoing, I find that the live haul poultry containers do not qualify for the agricultural exemption in Va. Code § 58.1-609.2 1, nor do they qualify for the industrial manufacturing exemption in Va. Code § 58.1-609.3 2. Therefore, the assessment of tax is correct.

Catwalk and Stairs

The Taxpayer states that the Department should pursue collection of the tax against the fabricator who fabricated, delivered and installed catwalks and stairs on new and existing roof areas of one of its processing plants. The Taxpayer contends that the fabricator acted as a contractor with respect to real property construction. The Taxpayer has furnished a copy of the description of work that was completed by the fabricator to support its position.

Title 23 of the Virginia Administrative Code (VAC) 10-210-560 A provides that an operation that changes the form or state of tangible personal property is fabrication. Title 23 VAC 10-210-560 B further states:

- The tax applies to the total charge for the fabrication of tangible personal property on a special order for a consideration including labor, even if charges for labor are separately stated . . . .

The description of work furnished by the Taxpayer is an itemized list and price sheet for the catwalks and stairways. This is not sufficient to demonstrate that the catwalks and stairs became a part of realty, thereby making the fabricator a real property contractor. Based on the information presented, I find no basis for an adjustment to the audit regarding this issue.

CONCLUSION

Based on this determination, the assessments are correct. An updated bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessments are paid within 30 days of the date of the updated bill. Please be advised that failure to submit payment of the bills within the 30-day limitation may result in the imposition of a 20% Amnesty penalty in accordance with the Virginia Tax Amnesty Program. Please see the enclosure entitled "Important Payment Information."

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact ***** of the Department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.virginia.gov or at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/50879Q

Rulings of the Tax Commissioner