Tax Type
Retail Sales and Use Tax
Description
Taxpayer's activities do not satisfy criteria of an industrial manufacturer
Topic
Classification
Manufacturing
Taxability of Persons and Transactions
Date Issued
05-10-2007
May 10, 2007
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling in regard to ***** (the "Taxpayer"), and its eligibility for the retail sales and use tax manufacturing exemption. The Taxpayer believes that it is entitled to a refund of the sales tax paid on certain equipment used in its operation. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer owns and operates an interstate natural gas transportation pipeline system that runs through Virginia. The Taxpayer's principal activity is to provide natural gas transmission from onshore and offshore wells to utilities, metropolitan distribution systems, industrial plants, and other customers in Virginia and other states.
The Taxpayer states that natural gas is highly pressurized as it travels through the interstate pipeline. To ensure that the natural gas flowing through any one pipeline remains pressurized, compression of the natural gas is required periodically along the pipe. Therefore, the Taxpayer places compressor stations along the pipeline where the natural gas is compressed by a turbine, motor, or engine to ensure the natural gas remains pressurized. The compressor stations contain separators that consist of scrubbers and filters that capture any liquids or other undesirable particles from the natural gas as it flows through the pipeline. Between stages of compression, the gas will also pass over intercoolers and aftercoolers to reduce the temperature of the gas in order to remove water vapor and oil vapor from the gas.
The Taxpayer seeks a ruling that the scrubbers, intercoolers and aftercoolers are exempt from the Virginia sales and use tax as machinery and equipment used directly in an industrial processing or industrial manufacturing operation. The Taxpayer believes that the machinery and equipment in question qualifies for the industrial manufacturing exemption pursuant to Va. Code § 58.1-609.3 2.
RULING
Virginia Code § 58.1-609.3 2(iii) exempts from the retail sales and use tax "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies used directly in processing [or] manufacturing . . . products for sale or resale."
Title 23 of the Virginia Administrative Code (VAC) 10-210-920 divides the activities involved in manufacturing and processing into three categories: administration, production and distribution. "Production" includes the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site." "Distribution" is defined as "the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the actual transport of the product for sale. All tangible personal property used to convey, transport, handle, store, market or display finished products is taxable.
Based on the information provided, production of the natural gas is complete before it is placed in the pipeline. The scrubbers, intercoolers and aftercoolers are used to remove particles, oil vapor and water vapor introduced during the transportation process. The equipment at issue is used in distribution activities and does not qualify for the manufacturing exemption.
Furthermore, Title 23 VAC 10-210-920 A states, "for a business to obtain the [industrial manufacturing] exemption, it first must be manufacturing or processing products for sale or resale and secondly, such production must be industrial in nature." Virginia Code § 58.1-602 contains a definition of "manufacturing, processing, refining, or conversion." The Department uses this definition as a guideline to determine if businesses are engaged in industrial manufacturing or processing. The definition states that the term "industrial in nature" shall include businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification ("SIC") Manual.
The distribution of natural gas for sale is classified in the SIC manual under code number 4923. The North American Industry Classification System ("NAICS") replaced the Standard Industrial Classification Manual in 1997. The NAICS classifies establishments primarily engaged in the pipeline transportation of natural gas from processing plants to local distribution systems under Industry Code 486210. Both the SIC and NAICS classifications place distributors of natural gas in codes that fall outside the statutory industrial manufacturing and processing classifications in codes SIC 10 through 14 and 20 through 39.
Based on the foregoing, the equipment at issue is used in taxable distribution activities. Furthermore, the Taxpayer's activities are not considered "industrial in nature" and, therefore, do not satisfy the criteria for being classified as an industrial manufacturer. Accordingly, the scrubbers, intercoolers and aftercoolers do not qualify for the industrial manufacturing exemption, and the Taxpayer is not entitled to a refund of the tax paid on the purchase of such equipment.
The Code of Virginia section and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions concerning this ruling, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-869175606T
Rulings of the Tax Commissioner