Administration: Interest - Waiver
May 21, 2025
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the period August 2017 through December 2020.
FACTS
An audit was conducted on the books and records of the Taxpayer, a metal fabricator. As a result, the Taxpayer was assessed sales and use taxes for assets, sales and purchases. The Taxpayer paid the assessment and filed an application for correction contending that two welding machines and 80% of the purchase price of two forklifts were exempt from the sales and use tax. Further, the Taxpayer requests the waiver and refund of a portion of interest for tax assessed on sales to one of its customers.
ANALYSIS
Strict Construction of Exemptions
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, Virginia case law requires strict construction of sales tax exemptions. Where 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 MotorBus, 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Manufacturing Exemption
The Taxpayer asserts that several of the purchases listed as exceptions in the audit were used in its fabrication operations. Virginia Code § 58.1-609.3 provides an exemption from the retail sales and use tax for machinery, tools, or repair parts used directly in manufacturing or processing for sale or resale. By definition, manufacturing and processing activities must be “industrial in nature” to qualify for the exemption. See Virginia Code § 58.1-602. In Commonwealth v. Orange-Madison Cooperative, 220 Va. 655 (1980), the Virginia Supreme Court interpreted the term “processing” to mean the treatment of a product that makes it more marketable or useful. Both Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1 and the decision in Orange-Madison make it clear that processing occurs only when a product is subjected to a treatment that makes it more marketable or useful.
Welding Machines
The Taxpayer was engaged in the business of fabricating steel products for commercial customers. Based on the information provided, the two welding machines were used to attach pieces of steel together in order to fabricate products meeting customer demands. Because they were used directly in the fabrication process, the purchase of these machines qualified for the manufacturing exemption.
Forklifts
The Taxpayer indicates that the forklifts were used to bring in raw materials and to move materials around the facility in different stages of manufacturing and finished product storage. In situations where an industrial processor uses a single piece of equipment in both a taxable and an exempt manner, a preponderance of use rule determines the tax application. See Virginia Code § 58.1-609.3 2. This rule is explained in Title 23 VAC 10-210-920 D, which states:
When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from the tax if the preponderance of its use is in exempt production activities.
The Taxpayer concedes the forklifts in question were utilized for multiple uses in the facility but argues that their principal use was in the fabricating and manufacturing areas. Under these circumstances, the Department must apply the preponderance of use rule to determine whether the primary use of the forklifts was for exempt activities. Although the Taxpayer believes the forklifts were used approximately 80% of the time for exempt purposes, no objective evidence has been provided to support this claim.
The audit report indicates that the auditor observed that one forklift appears to have been used primarily in the Taxpayer’s manufacturing and fabricating area. The other forklift, however, was relegated to use in the Taxpayer’s finished goods storage area.
Interest
The Taxpayer sold substantial amounts of structural, rail, and other steel to one customer without collecting sales tax. It reasoned that these sales were exempt sales to a railway common carrier. The Department listed these sales as exceptions because the customer provided the wrong exemption certificate. While it concedes the tax portion of the assessment, the Taxpayer stresses that it was not trying to commit fraud and requests that the Department waive interest accrued on the tax for these sales.
As a rule, Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money over a period of time. Therefore, the Department lacks the authority to waive interest properly assessed under the statute.
DETERMINATION
Based on the evidence provided, this case will be returned to the audit staff to review and adjust the assessment in accordance with the following determination.
The purchases of the two welding machines were exempt from the tax and will be removed from the audit.
While it appears that at least one of the forklifts may qualify for the manufacturing exemption, the lack of objective evidence hinders the Department’s ability to make a definitive determination. The auditor will arrange a time with the Taxpayer in order to observe its operations and any other documentation it may have in order to determine if the forklifts qualified for the manufacturing exemption.
The Department is unable to waive interest assessed on the audit liability.
Once the welding machines have been removed and the preponderance of use of the forklifts determined, the Taxpayer will be issued a revised audit report. Because the assessment has been paid, the revised liability will result in a refund that will be issued to the Taxpayer.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. If you have any questions regarding this response, you may contact ******** in the Office of Tax Policy and Legal Affairs, Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/3945.B.