May 25, 2021
Re: § 58.1-1821: 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 June 2013 through February 2019. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a land clearing contractor that also provides services, such as residential brush cutting, trail and road clearing, environmental management, and occasional timber harvesting. The Department’s audit revealed that the Taxpayer made untaxed purchases of machinery, tools, fuel and supplies. Both the auditor and the Taxpayer acknowledge that the equipment and associated purchases qualify for a prorated exemption pursuant to Virginia Code § 58.1-609.2 6 and Title 23 of the Virginia Administrative Code (VAC) 10-210-700. The auditor and the Taxpayer used transaction reports detailing the Taxpayer’s sales in 2017 and 2018 to determine an exemption amount based on the dual use of the equipment in both taxable and exempt activities. The auditor concluded that the equipment and associated purchases qualify for a prorated exemption of 20%. The Taxpayer disagrees with the auditor’s calculation and believes that the equipment qualifies for a prorated exemption of 87%. The Taxpayer also contests the inclusion of untaxed purchases of dyed diesel fuel in the audit.
DETERMINATION
Harvesting of Forest Products Exemption
Virginia Code § 58.1-609.2 6 provides a retail sales and use tax exemption for the following:
Machinery or tools and repair parts therefor 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. Harvesting of forest products shall include all operations prior to the transport of the harvested product used for (i) removing timber or other forest products from the harvesting site, (ii) complying with environmental protection and safety requirements applicable to the harvesting of forest products, (iii) obtaining access to the harvesting site, and (iv) loading cut timber or other forest products onto highway vehicles for transportation to storage or processing facilities. [Emphasis added.]
Title 23 of the Virginia Administrative Code (VAC) 10-210-700 further explains the exemption for the harvesting of forest products and defines the term “harvesting of forest products” to mean “the business of severing products from forests for sale or for use as a component part of a product to be sold.” In order to qualify for the exemption, the by-product of the Taxpayer's operation, i.e., the lumber, mulch or other forest products, must be for sale or for use as a component part of a product to be sold. In the present case, the Taxpayer generally provides a service to property owners in the form of cutting and grinding vegetation into mulch and occasionally harvests timber to be sold. Title 23 VAC 10-210-700 G states the following:
A harvester's use of supplies or equipment in both an exempt activity and a taxable activity will result in such items being subject to the tax unless he can accurately determine the percentage of use of such items or equipment in the harvesting of forest products as compared to his use of the supplies or equipment in a taxable activity. In such case the harvester can prorate the tax due on the supplies or equipment based upon his percentage of use of such items in a taxable activity.
The Department’s auditor reviewed the Taxpayer’s accounts payable records and listed as exceptions untaxed purchases of machinery, tools, fuel, and supplies. The Taxpayer claimed that it qualified for the cited exemption. The auditor agreed to review the Taxpayer’s transaction reports to determine if it qualified for the exemption. The auditor reviewed job descriptions on the transaction reports and listed as exempt any job description that included the harvesting of timber that was hauled away to be sold, as required by the statute. The auditor notes that the majority of the sales on the reports describes work grinding up scrub brush, small trees, briars and vines, improving access and usability of land, creating access to roads and trails, and providing access to timber sites for other timber harvester operations unrelated to the Taxpayer. Performing these activities without harvesting forest products for sale, or as a product to be sold, does not qualify the Taxpayer for the exemption.
The Virginia courts have consistently followed the “rule of strict construction” of Virginia sales and use tax exemptions. Under the doctrine of strict construction, “[s]tatutes granting tax exemptions are construed strictly against the taxpayer.” See Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973). In addition, “[e]xemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption.” See Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972).
Under audit, the Department determined the Taxpayer’s equipment was eligible for a prorated exemption based on both taxable and exempt use. The issue in this case is whether the prorated amount of tax accurately represents the Taxpayer’s use of the equipment and associated purchases in taxable and exempt activities. The Taxpayer has not provided any conclusive evidence to prove that the equipment and associated purchases were used in an exempt manner 87% of the time. Based on the cited authorities and the documentation reviewed during the audit and again during the appeal, the Taxpayer has failed to meet its burden of proving that the assessment is incorrect.
Untaxed Dyed Diesel Fuel
The Taxpayer contends that its untaxed dyed diesel fuel purchases are exempt from taxation, however, The Taxpayer also claims that the dealer was responsible for collecting the tax at the time of purchase. The Taxpayer references Virginia Tax Bulletin (VTB) 10-9 (8/24/2010).
The auditor notes that the Taxpayer provided the dealer with an exemption certificate to purchase the dyed diesel fuel exempt of the tax. The auditor determined that the Taxpayer should have treated the fuel in the same manner as the equipment used in both a taxable and exempt manner. The auditor applied the 20% prorated exemption amount to the untaxed dyed diesel fuel purchases.
Under long settled principles of sales and use tax law, the Department may seek payment of the tax from either the seller or the purchaser of tangible personal property. The case of United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977) aff'd, 569 F.2d 811 (4th Cir. 1978) held that while “the seller is legally obligated to collect the tax from the purchaser, the statute [Virginia Code § 58.1-625] makes the tax the legal debt of the purchaser.” Thus, the courts fully recognize that legal obligations apply to both the seller and the purchaser.
Based on the referenced statutes and bearing in mind the aforementioned determination for equipment used in both taxable and exempt activities, I find that the auditor appropriately assessed and calculated the prorated tax liability for untaxed diesel fuel purchases. In the absence of conclusive evidence that the equipment and associated purchases, including dyed diesel fuel, qualify for a prorated exemption greater than 20%, I do not find cause to revise the contested assessment.
Based on this determination, the assessment made by the auditor is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of the bill. If the Taxpayer has questions concerning payment of the assessment or bill, the Taxpayer may contact the Delinquent Collections Unit at 804-367-8045.
The Code of Virginia sections 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 web site. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3409.G