May 16, 2018
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period December 2010 through November 2016.
FACTS
The Taxpayer manufactures and repairs conveyor systems that are primarily used in coal mining operations. At issue is the tax assessed on sales of hex head bottom rollers (“bottoms”) and 2x2 drop hanger units (“hangers”) to one customer. The auditor concluded that the bottoms and hangers are structural steel supports affixed to concrete pillars and are taxable. The Taxpayer takes the position that the bottoms and hangers are repair or replacements parts for exempt machinery and equipment used directly in the mining process and are exempt from the tax. To support its position, the Taxpayer cites Title 23 of the Virginia Administrative Code (VAC) 10-210-960. During the audit, the Taxpayer did not provide an exemption certificate from its customer because of records lost due to flooding. With the appeal, the Taxpayer has provided the customer's Form ST-11 for review.
DETERMINATION
Mining Exemption
Virginia Code § 58.1-609.3 2 (iii) provides a sales and use tax exemption for “machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale. . .” The term “used directly” is defined in Virginia Code § 58.1-602 as:
those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance or administration. When used in relation to mining, it shall refer to the activities specified above, and in addition, any reclamation activity of the land previously mined by the mining company required by state or federal law.
Pursuant to Title 23 VAC 10-210-960 A, “[t]he fact that particular property may be considered essential to the conduct of the business of mining or mineral processing because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in mining or mineral processing operations.”
This regulation goes on to state that “Replacement and repair parts which are used to replace worn or damaged parts on exempt machinery and equipment. . . are deemed used directly in mining and/or mineral processing and are not subject to the tax.”
Additionally, the regulation states that:
Steel or similar supports which are a component part of exempt processing equipment or machinery and which do not become permanently affixed to realty are not subject to tax. The concrete foundations onto which such supports are bolted, floors on which machinery rests, and structures housing equipment and machinery are not used directly in processing and are subject to the tax.
Consistent with the cited authorities above, the mining exemption is only available in instances when the property is used directly in the mining process. The Taxpayer contends that the bottoms and hangers are used directly in the mining process and submitted documentation and photographs. Upon a review of the materials submitted by the Taxpayer, it is clear that the bottoms and hangers are an integral part of the conveyance system and qualify as replacement and repair parts that replace worn or damaged parts on exempt conveyor equipment. The hangers and bottoms are not supports or bolted to concrete foundations. Rather, the hangers and bottoms are tangible personal property that are integral to the operation of conveyor systems.
Exemption Certificates
Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Virginia Code § 58.1-623 A provides that all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt from the retail sales and use tax.
Title 23 VAC 10-210-280 A further explains that the burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
The Tax Commissioner has previously ruled in Public Document (P.D.) 98-29 (2/20/98) that the absence of an exemption certificate at the time of a sales transaction indicates the certificate was never accepted in good faith. In cases where a taxpayer accepts an exemption certificate that is incomplete or the certificate is obtained during or after an audit, the claim for exemption is subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit.
The Taxpayer stated that the certificate of exemption could not be provided to the auditor during the fieldwork because the records were lost due to flooding. With the appeal, the Taxpayer has provided the customer's Form ST-11 for review. Consistent with P.D. 98-29, the exemption certificate provided with the appeal is subject to greater scrutiny because it was received after the audit was completed. The Taxpayer has also provided documentation and photographs that demonstrate use of the bottoms and the hangers on the mining conveyor system. Because the bottoms and hangers are repair or replacement parts for an exempt conveyor system, the parts were used in an exempt manner and the ST-11 is accepted.
CONCLUSION
Based on this determination, the contested assessments will be abated in full. The Code of Virginia sections, regulations and public document 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 Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1485.H