Document Number
09-100
Tax Type
Retail Sales and Use Tax
Description
Agricultural exemptions for industrial manufacturing and processing and the harvesting of forest products
Topic
Agricultural
Exemptions
Manufacturing Exemption
Date Issued
06-24-2009


June 24, 2009





Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period October 2001 through August 2007. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer operates a cattle farm and grows hay on the farm to feed the cattle. The Department audited the Taxpayer and assessed use tax on various fixed asset and expense purchases made by the farm. The Taxpayer is disputing the assessment of the tax on purchases of a tub grinder, excavator, thumb attachment and repair parts for the tub grinder and excavator. The Taxpayer maintains that the agricultural exemption in Va. Code § 58.1-609.2 applies to these items. Alternatively, the Taxpayer suggests that the exemptions for industrial manufacturing and processing and the harvesting of forest products may also apply to its use of the equipment.

DETERMINATION


The Taxpayer states that the grinder and excavator were purchased to begin a recycling business that would produce mulch and organic materials for sale or resale. At the time the audit was assessed, the Taxpayer had not started the recycling business and had never used the equipment to manufacture or process recycled materials for sale or resale. Because one of the principals of the Taxpayer developed health problems, the Taxpayer has never started the recycling business. The Taxpayer indicates the equipment was used to produce organic material that was spread on the soil to enrich it, much like lime and fertilizer products.

Agricultural Exemption
    • Virginia Code § 58.1-609.2 provides an exemption for:
    • 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 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 ...

The auditor indicates the equipment was used to clean up debris and repair damage to the farm caused by tornados. Written correspondence from the Taxpayer's accountant to the Taxpayer dated January 15, 2008, and correspondence from the Taxpayer to the Department dated February 14, 2008, confirm that the equipment was used to clean storm damage and make repairs to damaged property and structures on the farm. This correspondence indicates the equipment was used to build and dredge ponds, to make erosion control repairs, to repair fence lines, to construct a stream crossing and similar activities.

The Department ruled in Public Document (P.D.) 98-197 (11/30/98) that permanent fencing used on farms is considered a part of real property and does not enjoy the agricultural exemption. P.D. 05-133 (8/10/05) states that equipment and supplies used to erect, repair and maintain fencing do not qualify for the agricultural exemption. Equipment and supplies used in this manner are not considered to be used in agricultural production for market. These activities are performed in connection with real property and are ancillary to the business of operating a farm. The equipment and parts at issue were used by the Taxpayer in various real property activities. As such, the equipment and parts do not qualify for the agricultural exemption.

The Taxpayer maintains that the equipment was used to produce organic materials that were spread on the farm property to enhance the soil. I am not persuaded that this use of the equipment qualifies for the agricultural exemption. The Taxpayer has not demonstrated when or where the organic materials were spread or how the use of the organic materials relates to cattle farming. It is not evident that the use of mulch on farm pastures is necessary for raising cattle. The Taxpayer does grow hay to feed the cattle. However, the growing of the hay is not agricultural production for market as the hay is used to feed the Taxpayer's cattle. The subject equipment was clearly used in various taxable activities on the farm. If the Department agreed that the agricultural exemption applies to the use of the equipment, the purchase of the equipment would be prorated based on taxable and exempt usage. It appears from the facts presented that the exempt usage is minimal, at best.

Industrial Manufacturing and Processing Exemption

The Taxpayer suggests the industrial manufacturing and processing exemption may apply to the purchase of the equipment. Virginia Code § 58.1-609.3 2(iii) provides an exemption for "machinery or tools or repair parts therefor or replacements thereof, ... used directly in processing, manufacturing, ... or converting products for sale or resale." (Emphasis added.) To qualify for this exemption, the manufacturing or processing activity must be industrial in nature and it must produce a product for sale or resale. See Title 23 of the Virginia Administrative Code (VAC) 10-210-920 A. The Taxpayer has never used the equipment at issue to produce products for sale or resale. Therefore the manufacturing and processing exemption does not apply to the equipment purchased by the Taxpayer.

Harvesting of Forest Products Exemption

The Taxpayer also suggests the forest products harvesting exemption may apply to the purchase of the equipment. Virginia Code § 58.1-609.2 6 provides an exemption for "[m]achinery or tools and repair parts therefore or replacements thereof, fuel, power, energy or supplies, used directly in the harvesting of forest products for sale or for use as a component part of a product to be sold." (Emphasis added.) To qualify for this exemption, the harvesting activities must produce forest products for sale or produce products that will become a component part of a product that will be sold. The Taxpayer has not used the equipment at issue to produce forest products for sale or as a component part of a product for sale. Therefore, this exemption does not apply to the equipment purchased by the Taxpayer.

CONCLUSION


In this case, the Taxpayer was unable to start a recycling business as originally intended. The equipment at issue was used in a taxable manner to clean and remove storm debris and make real property repairs on the farm. Virginia courts have historically required strict construction of sales tax exemptions. If there is any doubt whether an exemption applies, the doubt is resolved against the one claiming the exemption. See Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975). Thus, the use tax was correctly assessed on the tub grinder, excavator, thumb attachment and related repair or replacement parts. The Taxpayer will be issued an updated bill with accrued interest. The bill should be paid within 30 days to avoid the accrual of additional interest.

The Code of Virginia sections, regulation and public documents 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 regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner




AR/1-2416189740S


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46