13-100 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax assessed on various purchases and sales of tangible personal property and untaxed delivery and fuel surcharges

Topic

Manufacturing Exemption

Tangible Personal Property

Date Issued

06-11-2013

June 11, 2013

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

Dear *****:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period June 2009 through May 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer produces and sells ready mix concrete. An audit resulted in the assessment of tax on various purchases and sales of tangible personal property. The Taxpayer contests the sales tax assessed on untaxed delivery and fuel surcharges made in connection with the sale of its ready mix concrete products. The Taxpayer maintains that such charges are statutorily exempt from the tax. The Taxpayer also contests the use tax assessed on skid steer equipment and maintains that it is also statutorily exempt from the tax.

DETERMINATION

Delivery and Fuel Surcharges

The Department's policy on retail sales of concrete produced in concrete mixer trucks is longstanding, as it was initially promulgated in a regulation in 1985. Such regulation is currently set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-360 B, which specifically provides the following:

- The tax applies to retail sales of concrete produced in concrete mixer trucks. The amount on which the tax must be computed includes the charge for the concrete as well as any other service charges connected with such sale. Examples of taxable service charges include "short load," "holding time" charges, and any other transportation charges, regardless of whether such charges are separately stated. [Emphasis added.]

The basis for this policy can be found in Public Document (P.D.) 82-65 (5/13/82), in which the Tax Commissioner concluded:

- The Department has determined that a concrete mixer unit affixed to a motor vehicle is machinery used directly in manufacturing. However, since the manufacture of concrete is in progress during the period of transit, no ready-mix concrete has been manufactured until the vehicle reaches its destination. Consequently, no portion of the delivery charge can be excluded as separately stated transportation since the delivery of ready-mix concrete constitutes the manufacture of the product. [Emphasis added.]

I would note that the exemption for separately stated transportation or delivery charges was originally enacted in 1966 as an exclusion from the definition of "sales price." Since that time, it has been set out as a separate exemption from the sales tax. I would further note that the Department promulgated a regulation applicable to the exemption for separately stated transportation charges. That regulation is currently set out in Title 23 VAC 10-210-6000. In subsection B of the regulation, the terms "transportation" and "delivery charges" are defined as "charges for delivery from the seller to the purchaser, commonly known as "transportation-out."

Notwithstanding, an exception to the above transportation regulation was made with respect to the delivery of ready mix concrete as clearly expressed in Title 23 VAC 10-210-360 B (and explained by P.D. 82-65) because the ready mix concrete continues to undergo manufacturing or processing and is not a saleable product until it reaches its delivery destination where the retail sale is made. Even if the ready mix concrete were saleable before leaving the Taxpayer's plant site, the concrete mixture must continue to be continuously mixed and agitated in order to remain in an unhardened and marketable state until delivery at the job site.

In the appeal, the Taxpayer lists several reasons for why it believes that the delivery and fuel surcharges at issue should not be taxable. The Taxpayer's contentions are listed below (in italics) and are followed by the Department's responses.

Contention 1

The statute exempting delivery charges was not enacted until 1993, after the years in question in the rulings that were supplied to us, and after the regulation in question was last amended. Put another way, the authority that was cited does not seem to reflect current law, which overrides regulations and rulings.

As noted above, the transportation exemption was enacted in 1966. Rulings and regulations were adopted after such enactment. While Title 23 VAC 10-210-360 has been in its current form since 1993, subsection B (sales) of such regulation was originally adopted in 1985 as part of § 630-10-24.2 of the sales and use tax regulations on concrete mixer trucks.

Contention 2

Rulings that were handed down by the Commissioner after this law change became effective, like P.D. 08-53 [4/30/08], show that as long as the charges are not handling or demurrage, they are exempt. P.D. 09-54 [5/1/09] confirms this on fuel surcharges also. [Inserts added.]

In P.D. 08-53, a precast concrete manufacturer was assessed on fuel surcharges, offloading charges, and demurrage charges. The Tax Commissioner exempted the fuel surcharges as being part of the cost of exempt transportation but taxed the offloading and demurrage charges. Because the taxpayer in such case was not manufacturing concrete in a truck, the policy set out in Title 23 VAC 10-210-360 B for taxing all services was not applicable to such taxpayer.

The Taxpayer in P.D.09-54 rents out party tents. While its sales are entitled to the transportation exemption as it has a completed product when it delivers rental tents, such tent rental business is not manufacturing tents during delivery to customers. Accordingly, P.D.09-54 has no bearing on the Taxpayer's case.

Contention 3

Regardless of this, the statute flatly states that the charges are exempt.

The statute at issue is Va. Code § 58.1-609.5 3 that exempts "[t]ransportation charges separately stated." The transportation exemption is not applicable until the finished concrete product is ready for sale at retail. The ready mix concrete is not ready for sale until it is delivered at the destination point. While I understand the Taxpayer's disagreement over this issue, I must recognize the Department's longstanding and consistent policy as set out in Title 23 VAC 10-210-360 B.

Contention 4a

The ready mix concrete rulings do not apply or make sense here [because] these rulings are older rulings that again predate this statute [i.e., the exemption for separately stated transportation charges]. [Inserts added.]

None of the ready mix concrete rulings predate the exemption for separately stated transportation charges. Such exemption was one of the original exclusions from sales price enacted in 1966 when the Virginia Retail Sales and Use Tax Act came into effect.

Contention 4b

The ready mix concrete rulings do not apply or make sense here [because] a more recent ruling, P.D. 97-208 [4/29/97] says that pre-cast and ready mix concrete businesses are the same this was the issue in an occasional sale exemption situation. [Inserts added.]

Based on a review of P.D. 97-208, I could not find any language in such ruling where it states, or otherwise implies, that pre-cast and ready mix businesses are the same.

Contention 4c

The ready mix concrete rulings do not apply or make sense here [because] another more recent ruling, P.D. 11-8 [1/20/11], involved "transportation or delivery charges" charged by a rock quarry operator that was also a ready mix concrete vendor. If these older precast vs. ready-mix rulings were still good under the new statute the Commissioner could have disposed of the taxpayer's argument by saying so, but instead the Commissioner had to resort to the taxpayer's failure to produce enough evidence regarding their delivery charges (taxpayer did not meet the burden of proof). [Inserts added.]

In P.D. 11-8, the taxpayer operated a rock quarry and produced aggregate, asphalt mix and ready mix concrete. In its appeal, one of the issues involved separately stated transportation charges in which the taxpayer claimed to have paid tax in error based on the exemption in Va. Code § 58.1-609.5 3. However, the taxpayer produced no evidence in support of its refund claim. Without such proof, it was not possible to identify which of its sales of tangible personal property were connected to the contested transportation charges. Nor was the Department provided with any documentation related to the contested charges. In the absence of any evidence to consider the matter, the Department could not determine whether the Taxpayer had any basis in its contention or whether its claim was based on an erroneous contention such as requesting a refund of tax correctly charged in accordance with Title 23 VAC 10-210-360 B. Accordingly, I find no basis for the Taxpayer to rely upon P.D. 11-8 in support of its Contention 4c.

Contention 4d

The ready mix concrete rulings do not apply or make sense here [because] keeping pre-made concrete in a spinning drum is not manufacturing — it is preservative only — it preserves the previously manufactured product so that it may be delivered in a usable form. Preservative functions are not manufacturing. P.D. 96-278 [10/15/96]. It's also more like the restaurant delivery ruling in the September 3, 1985 Commissioner Ruling. [Inserts added.]

For a business to obtain the manufacturing exemption, Title 23 VAC 10-210-920 A sets out that "it first must be manufacturing or processing products for sale or resale and secondly, such production must be industrial in nature." Since 1985 and in accordance with the definition of manufacturing in Va. Code § 58.1-602, the determination of whether a manufacturer is industrial in nature is based upon whether such establishment can be classified or is substantially similar to those businesses classified in codes 10 through 14 and 20 through 39 as published in the Standard Industrial Classification (SIC) Manual for 1972 and any supplements issued thereafter. The SIC code #3273 applies to those establishments primarily engaged in producing and delivering unhardened ready-mix concrete as a manufacturing establishment. This manufacturing classification includes the production and sale of central-mixed concrete, shrink-mixed concrete and truck-mixed concrete.

The Department's policy is not unique among the states. In fact, a number of states' courts have ruled in similar fashion. For instance, the Supreme Court of Oklahoma ruled in Auxier Scott Supply Co. v. Oklahoma Tax Com’n, 527 P.2d 159, 162, No. 46555 (1974), that "[t]he manufacturing or processing operation of ready-mix concrete continues in the mobile ready-mix concrete mixer until delivery to the job-site." In the Massachusetts case of Wakefield Ready-Mix Con. Co. v. State Tax Com'n, 356 Mass. 8, 247 N.E.2d 869, 871 (1969), the court ruled that "[we] have no doubt that the process carried on in the mixer trucks between one of Wakefield's batching plants and a jobsite is manufacturing. It is an essential part of mixing the concrete and keeping it in a fluid state. The manufacturing process continues until the concrete leaves the mobile mixer." In W.E. Anderson & Sons Co. v. Glander, Tax Commr., 154 Ohio St. 561, 97 NE2d 29 (1951), the Supreme Court of Ohio ruled that "[t]his mixer is mounted on and attached to a motor truck chassis, and the mixing or manufacture of the concrete occurs, by the operation of machinery connected with the mixer, during the time the mixer and its contents are being transported on the motor truck to the location where the concrete is to be delivered and utilized."

The Taxpayer contends that the spinning of concrete in the mixing unit is not manufacturing but is a non-manufacturing preservative function similar to the use made of the cylinder pallets addressed in P.D. 96-278. In that ruling, an industrial printer maintained that the manufacturing exemption applied to cylinder pallets that were claimed to preserve or protect the quality of the finished product. The cylinder pallets were used to store printing cylinders used on printing presses but at no time used in production line testing or quality control activities. Rather, they were used only before or after the production process and such use was outside the actual manufacturing process. As such, the Tax Commissioner held that the pallets were used indirectly in the manufacturing process and were taxable. In contrast, the mixing unit of a concrete mixer truck is used directly in the production of a concrete product by transforming raw materials into a finished product. While the mixing unit continuously maintains the concrete in its finished state, such constant agitation of the concrete mixture by the mixing unit is necessary to maintain the integrity of the product until the concrete is discharged at the destination. Thus, the mixing unit plays a direct role in the production and quality control of the concrete.

The Taxpayer cites the ruling of P.D. 85-172 (9/3/85) as further support for denying the manufacturing exemption to the mixing unit. In such ruling, the Tax Commissioner was asked whether delivery charges added to a pizza delivery would be subject to the Virginia sales and use tax. The Tax Commissioner explained the general policy for exempting delivery charges when separately stated on the invoice and for taxing such charges when not separately stated. Such ruling, however, has no bearing on the delivery and fuel surcharges at issue in the Taxpayer's case because pizza is a finished product before it is placed into the delivery vehicle (unlike the ready mix concrete that is processed in the mixing unit that transforms raw ingredients into a finished product) and does not require further processing (unlike the concrete that must be constantly agitated and processed to remain in a saleable fluid state until it can be delivered at the job site).

Contention 4e

The ready mix concrete rulings do not apply or make sense here [because] we understand that Virginia has seen fit to exempt certain concrete truck parts when they are used in manufacturing. But we were not using our truck as manufacturing for these deliveries, and we never took a manufacturing exemption (in Virginia or elsewhere) on our truck. It may make sense to be symmetric and impose tax on one part of the supply and sales chain, but not on the other. We did not claim an exemption on any earlier link in the chain.

As previously noted, the Department's policy on the application of the manufacturing exemption to mixing units on concrete mixer trucks and taxing of delivery charges in connection with sales of concrete is longstanding and has been published since at least 1985. An exception cannot be made in the Taxpayer's case simply because it may not be in a position to claim the manufacturing exemption.² Moreover, the concrete sales made by the Taxpayer in Virginia are subject to the laws set out in the Virginia Retail Sales and Use Tax Act and the administrative rules, regulations and policies that interpret such Act.

Skid Steer Equipment

The Taxpayer indicates that skid steer equipment was purchased and picked up by the Taxpayer in Virginia and taken out of state for its use outside Virginia. The Taxpayer maintains that such equipment is tax-exempt because it is not used in Virginia and is eligible for the manufacturing exemption.

The Supreme Court of Virginia addressed a similar situation in Commonwealth v. Pounding Mill Quarry Corp., 215 Va. 647, 651-52, 212 S.E.2d 428, 431 (Va. 1975). In that opinion, the court held the following:

- The taxpayer argues that it should be exempt from the sales tax because the property was not used or consumed in Virginia but was immediately transported to West Virginia where it was used or consumed. The Act, however, exempts only ‘(d)elivery of tangible personal property outside this State for use or consumption outside this State.’ Code § 58-441.6(r).* Since both sale and delivery occurred in this state, Virginia could have validly imposed a sales tax upon such a sale even though the parties knew that the purchaser intended to immediately transport the property to another state and use it there. [*Currently, Va. Code § 58.1-609.10 4.]

Because both the sale and delivery occurred in Virginia, the skid steer equipment is subject to the Virginia retail sales and use tax in accordance with the decision in Pounding Mill Quarry although it may have been immediately removed from Virginia for permanent use outside Virginia. Furthermore, a sale in Virginia occurs when either title or possession to tangible personal property transfers in Virginia. See definition of "sale" in Va. Code § 58.1-602. A sale in interstate commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia. See Title 23 VAC 10-210-780 A. Because the Taxpayer took possession of the equipment in Virginia, the contested purchase is subject to taxation in Virginia and does not constitute an exempt sale in interstate commerce.

The Taxpayer also contends that the manufacturing exemption applies to the contested equipment. The Taxpayer has provided no facts on how the equipment is used directly in manufacturing, although verbally asked by the appeals analyst handling this case. According to the auditor, the skid steer equipment is used in construction activities. Based on these facts, I find no basis for removing this item from the audit.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, 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, 600 East Main Street, 23^rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5211008804.R

1. The Department's policy is not unique among the states. The Illinois Department of Revenue issued Letter No. 87-0367 (5/21/87), 1987 WL 53463, in regard to ready mixed concrete and stated that delivery charges were taxable because they "are considered to be a part of [the] production cost since, through agitation and churning, the production process continues during delivery." [Insert added for clarity.]
2. It is my understanding that the Department's auditor allowed a credit in the audit for tax erroneously accrued on exempt manufacturing equipment used in Virginia

Rulings of the Tax Commissioner