March 6, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of consumer use tax assessments issued to ***** (the “Taxpayer”) for the period February 2010 through January 2016. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a demolition, site work and environmental services contractor. The Taxpayer also owns and operates three recycling centers in Virginia that recycle construction debris, concrete, plastics and metal. The Department audited the Taxpayer and assessed consumer use taxes on various fixed asset and expense purchases. The Taxpayer contests the assessment of the tax on purchases of equipment and parts that it contends qualify for the manufacturing and processing exemption. The Taxpayer maintains that the tax was improperly assessed on other transactions, such as purchases in which the sales and use tax was paid to vendors, purchases of advertising services and loan payments.
In addition, the Taxpayer offers $***** to settle the audit liability in full.
DETERMINATION
Strict Construction of Exemptions
The Virginia courts have consistently required the strict construction of sales and use tax exemptions. Based on this principle, if there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).
In addition, Virginia Code § 58.1-205 1 states that “[a]ny assessment of a tax by the Department shall be deemed prima facie correct.” This means that the burden is on taxpayers to prove that an assessment issued by the Department is not correct. Keeping the cited authorities in mind, I will address the issues raised by the Taxpayer.
Industrial Manufacturing and Processing Exemption
The Taxpayer contends that the assessment of use taxes on certain purchases of equipment and parts is erroneous because the items qualify for the manufacturing and processing exemption. Virginia Code § 58.1-609.3 2 (iii) provides an exemption from the retail sales and use tax for “[m]achinery 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 ….”
Based on the definition of manufacturing and processing in Virginia Code § 58.1-602, manufacturing and processing activities must be “industrial in nature” to qualify for exemption. The term “industrial processing” is defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B to include establishments engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable. Both this regulation section and the definition of manufacturing and processing in Virginia Code § 58.1-602 state that the Department relies on the Standard Industrial Classification Manual published by the U.S. Department of Commerce to determine those industries that qualify as “industrial manufacturers or processors.” Industrial processors and manufacturers include those industries classified in, but not limited to, SIC codes 10 through 14 and 20 through 39.
The SIC Manual has since been replaced with the North American Industrial Classification System (NAICS) Manual, which was most recently updated in 2017. The Department now uses the NAICS to determine those industries that qualify as industrial processors or manufacturers. Both the SIC and NAICS manuals assign industrial classifications according to the primary business activity of the business. Unless the primary business activity is an industrial classification, the Department does not consider the business activity to be industrial in nature. In such cases, the business is not entitled to the sales tax exemption for industrial manufacturing and processing.
The Taxpayer claims that the contested equipment is used in recycling activities that include processing concrete, ferrous and nonferrous metals and recovering material from concrete debris. Dumpsters are used to collect waste from construction sites and the collected materials are then returned to the Taxpayer’s recycling facilities. The contested parts are replacements used on the equipment that is claimed to be exempt.
Based on a review of the Taxpayer’s business activities, the Taxpayer primarily operates as a demolition and construction contractor. The Taxpayer’s operations are most similar to businesses classified in the NAICS Manual under Section 238910, Site Preparation Contractors. This classification falls under the general classification 238, Specialty Trade Contractors. Under the NAICS, a business or industry must be classified under Sectors 31 through 33 to be considered industrial manufacturers or processors. Based on the Taxpayer’s classification in Sector 23 of the NAICS, its primary business activities are not industrial in nature for purposes of qualifying for Virginia’s manufacturing and processing sales tax exemption.
Public Document (P.D.) 14-153 (8/28/14), which was provided with the Taxpayer’s appeal, discusses a waste collection business that recycles paper and metal waste. The waste materials are collected and returned to a recycling site, weighed and then distributed to the appropriate recycling area at the site. In P.D. 14-153, the Tax Commissioner concluded that the primary business activity of that business was waste collection and disposal services. This business activity is not industrial in nature as determined by the NAICS. As such, the business did not qualify for the manufacturing and processing exemption in Virginia Code 58.1-609.3 2 iii.
Based on the information provided and the cited authorities, there is no basis to conclude that the Taxpayer qualifies for the industrial manufacturing and processing exemption.
Sales Tax Charged by Vendors
The Taxpayer states that the retail sales tax was charged by the seller on two of the transactions assessed in the audit. Based on documentation provided by the Taxpayer, the auditor has verified that the sales tax was charged on the purchase of equipment listed as exception #7 in the fixed asset exceptions list and on exception #39 in the purchases exceptions list. These transactions will be removed from the audit.
Computer Equipment
The Taxpayer provided invoices for the purchase of computer equipment that was listed in the audit as a taxable fixed asset exception. The invoices were not made available to the auditor during the audit. Based on the information submitted, the invoices provided for fixed asset exception #8 will be reviewed and the appropriate adjustments made to the audit.
Office Equipment
The Taxpayer provided invoices for purchases of office equipment that was listed in the audit as a taxable fixed asset exception. The invoices were not made available to the auditor during the audit. Based on the information submitted, the invoices provided for fixed asset exception #9 will be reviewed and the appropriate adjustments made to the audit.
Unknown Transaction
The Taxpayer states that the source cannot be identified for an equipment and tools entry listed as fixed asset exception #10 in the audit’s fixed asset exceptions list. This audit entry is described in the fixed asset exceptions list as “taxable wastequip R/O.” Based on this description, the transaction may be for roll off containers. However, I will have the auditor revisit the inclusion in the audit of this entry. The Taxpayer must provide access to its fixed asset records to allow the auditor to review this exception entry. The audit will be adjusted based on the auditor’s review.
Advertising Purchases
The Taxpayer provided documentation that demonstrates exception #s 14 and 26 through 29 in the audit’s purchases exceptions list are purchases of advertising space in a trade publication. These transactions qualify for the advertising exemption in Virginia Code § 58.1-609.6 5 and will be removed from the audit.
Loan Payments
The Taxpayer contends that payments for loans taken to finance the purchase of equipment were improperly assessed in the audit. The Taxpayer states that exception numbers 40, 42, 44, 48, 52 and 55 from the purchases exceptions list are loan payments for a Bobcat excavator. Purchases exception numbers 43, 47, 51 and 54 are loan payments for dumpsters and exception #53 is a loan payment for a trencher. The Taxpayer has provided the invoices for the transactions assessed in the audit.
Based on a review of the invoices provided, it cannot be confirmed that the disputed transactions are loan payments. A determination cannot be made on this issue without additional documentation to support the removal from the audit of these items. The Taxpayer should provide the supporting loan documents and sales contracts for the equipment specified on the invoices. The loan documents and sales contracts should confirm that the contested transactions are loan payments for the equipment specified on the invoices. Further, the documentation should demonstrate that the Taxpayer paid the sales or use tax on the equipment. The Department’s auditor will review the information furnished by the Taxpayer and adjust the audit, if warranted.
Duplicate Transaction
The Taxpayer claims that exception #50 in the audit’s purchases exceptions list is a duplicate of exception #11 in the fixed asset exceptions list. The auditor has verified that this transaction was duplicated in the audit. Exception #50 will be removed from the purchases exceptions list.
Offer in Compromise
The Taxpayer offers to settle the audit liability for $*****. Virginia Code § 58.1-105 B grants the Tax Commissioner the authority to accept an offer in compromise for assessments of doubtful liability or doubtful collectibility. Based on this determination, certain transactions will be removed from the audit and the liability reduced accordingly. The Taxpayer has not shown that the tax liability on the remaining transactions assessed in the audit is doubtful. The Taxpayer does not claim that the collection of the assessments is doubtful. Accordingly, there is no basis to accept the Taxpayer’s settlement offer.
CONCLUSION
As soon as practicable, a member of the Department’s audit staff will contact the Taxpayer and arrange to review the documentation requested in this determination. The Taxpayer will be allowed 45 days from the date of the Department’s contact to provide the necessary information. The Taxpayer’s audit will be revised in accordance with this determination and based on the review of the requested documentation. The Taxpayer will be issued a revised audit report and revised bills. The balances on both bills should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulation and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1395.S