July 15, 2019
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 August 2008 through July 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a general contractor engaged in heavy construction services provided through its divisions. As a result of the Department’s audit, the Taxpayer was assessed the use tax on certain untaxed purchases. The Taxpayer contends that certain asset purchases were being used in tax-exempt activities, including gas well sites and reclamation work. The Taxpayer also contends that for certain purchases included in the audit, the end users were coal companies engaged in tax-exempt mining activities. With regard to two particular purchases, the Taxpayer claims that only tax-exempt labor was involved. Lastly, the Taxpayer claims that any tax due on purchases made prior to an ownership change of the business in October 2010, should be paid by the prior owners. The Taxpayer seeks a revision of the Department’s assessments.
DETERMINATION
Mining
Pursuant to Virginia Code § 58.1-609.3 2 v, an exemption from retail sales and use tax is available for “machinery, tools and equipment, or repair parts therefor or replacements thereof” if the preponderance of their use is directly in processing, manufacturing, refining, mining or converting products for sale or resale. The provisions of this specific exemption do not apply to the drilling or extraction of oil, gas, natural gas and coalbed methane gas.
Virginia Code § 58.1-609.3 12 states, in pertinent part, the retail sales and use tax shall not apply to:
raw materials, fuel, power, energy, supplies, machinery or tools or repair parts therefor or replacements thereof, used directly in the drilling, extraction, or processing of natural gas or oil and the reclamation of the well area .... Machinery, tools and equipment or repair parts therefor or replacements thereof, shall be exempt if the preponderance of their use is directly in the drilling, extraction, refining or processing of natural gas or oil for sale or resale, or in well area reclamation activities required by state or federal law. [Emphasis added.]
Virginia Code § 58.1-602 defines "used directly:”
[w]hen used in relation to manufacturing, processing, refining, or conversion, refers to 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 of the Virginia Administrative Code (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.
In accordance with the foregoing authorities, the mining exemption is only available in those instances where the property at issue is being used directly for mining operations. The Taxpayer contends that the assets at issue are used in such operations. However, the Taxpayer did not present evidence to the auditor to support its contention that the contested assets are used directly in mining operations, nor was the information provided with the Taxpayer’s appeal. Accordingly, I find no basis for an adjustment of the audit regarding this issue.
Contractor
Virginia Code § 58.1-610 provides the basic rules and application of the tax to contractors. Subsection A of this code section provides:
Any person who contracts ... to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property ... to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person is deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale.
In all instances involving purchases in which the Taxpayer states it was not the end user, the Taxpayer acted in the capacity of a contractor. Pursuant to Virginia Code § 58.1-610, the Taxpayer was deemed the user and consumer of the materials at issue. Regarding the transaction involving the purchase of job clocks and related items, the Taxpayer paid the vendor for the items using a credit card. However, the invoice at issue did not show any application of the Virginia sales tax. Therefore, the transaction was properly included in the Department’s audit.
Another transaction involving certain materials was billed to the Taxpayer and shipped to a location in which the Taxpayer was acting as a contractor. The auditor held the Taxpayer liable for the tax on the purchase of the materials. While the invoice at issue reflects an application of sales tax, the tax that was applied was the West Virginia sales tax and not the Virginia sales and use tax. The property at issue was being used and consumed in Virginia; therefore, the proper application of the tax is the Virginia sales and use tax. Accordingly, this transaction was properly included in the audit.
With respect to a third invoice, a purchase was made for an item identified only as a quantity of one “8X10”. There is no further description on the invoice and no sales tax was charged. Accordingly, there is no basis to remove this purchase from the audit.
The Taxpayer also contests the application of the tax to two additional purchases, one of which does not show the application of any sales tax and the other for which there is no invoice to review. The Taxpayer contends that the purchase invoice for railcart standards, hitches and pins represents the purchase of labor. However, there was no explanation or documentation provided with this invoice to prove the Taxpayer’s position. There was a notation, however, written across the face of the invoice with the word welding. This notation in and of itself does not prove that the transaction represents labor only. This invoice on its face represents the purchase of tangible personal property without the payment of the sales tax to the vendor. Therefore, without a reasonable explanation, this invoice was properly included in the audit.
Lastly, with regard to the equipment purchase transaction, an invoice for that transaction was not submitted to the auditor or the Department with the Taxpayer’s appeal. I find no basis to remove the transaction from the audit.
Successor Liability
Virginia Code § 58.1-629 provides that:
If any dealer liable for any tax, penalty, or interest levied hereunder sells out his business or stock of goods or quits the business, he shall make a final return and payment within fifteen days after the date of selling or quitting the business. His successors or assigns, if any, shall withhold sufficient of the purchase money to cover the amount of such taxes, penalties, and interest due and unpaid . . . If the purchaser of a business or stock of goods fails to withhold the purchase money as above provided, he shall be personally liable for the payment of the taxes, penalties, and interest due and unpaid on account of the operation of the business by any former owner.
In this instance, the Taxpayer was a family operated and owned business. Two of the partners decided to dissolve their ownership interests. As a result of court intervention, stock valuation was adjusted and ownership of the Taxpayer changed. In reviewing the court’s final order, there is no stated guidance within the document that specifically allows for a reduction of the payment of the adjusted stock valuation to cover any taxes, penalties or interest due or unpaid during the period prior to the change in ownership. Since sufficient monies were not withheld to account for unpaid taxes, I find that in accordance with Virginia Code § 58.1-629, the current owners are responsible for unpaid taxes and interest for the audit period at issue.
CONCLUSION
Based on the documentation provided during the audit and the cited authorities, I find no basis to adjust the Department’s audit assessments. The Department’s assessments are correct and the outstanding balances remain due and payable. Updated bills, with interest accrued to date, will be sent to the Taxpayer shortly. No additional interest will accrue provided the bills is paid within 30 days from the date indicated on the bill statement.
The Code of Virginia sections and regulations cited are available on-line in the Laws, Rules and Decisions section of the Department’s website, located at www.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/689.H