Contractors: Use Tax
June 2, 2025
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of your client (the “Contractor”) in which you request a ruling on the application of the Virginia retail sales and use tax to wind electric generating equipment constructed by the Contractor and used to produce electricity for sale or resale.
This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
FACTS
The Contractor will build an offshore wind farm and transfer ownership to a utility provider once it is complete. The wind farm will be located about 24 nautical miles off the Virginia coast in federal waters. Export and array cables will connect wind turbines to an onshore substation in Virginia. The onshore substation will be constructed, owned, and operated by a utility provider. The Contractor intends to purchase the majority of the construction materials outside Virginia but may temporarily store them inside Virginia. Actual construction, however, will take place in federal waters. The Contractor will also install software programs related to the wind turbines at the onshore substation. The Contractor requests a ruling regarding whether its purchase of the materials will be exempt from the retail sales and use tax under either the temporary storage exemption for contractors or the manufacturing exemption.
RULING
Contracting
Virginia Code § 58.1-610 A states, in part, that “[a]ny person who contracts orally, in writing, or by purchase order, 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, shall be deemed to have purchased such tangible personal property for use or consumption.” See also Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A. Pursuant to Virginia Code § 58.1-604, a use tax is imposed “upon the use or consumption of tangible personal property in this Commonwealth ...”
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, the Virginia Supreme Court 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. Research Analysis Corporation, 214 Va. 161 (1973), Commonwealth v. Community MotorBus, 214 Va. 155 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Manufacturing Exemption
Virginia Code § 58.1-609.3 2 (iii) provides an exemption from the retail sales and use tax 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 ... .” Contractors may purchase machinery and tools to be used directly in industrial manufacturing or processing exempt from the tax. See Title 23 VAC 10-210-410 A.
The Department’s longstanding policy is that the production of electricity for sale or resale is a process entitled to the industrial manufacturing and processing exemption. See Public Document (P.D.) 86-218 (11/3/1986), P.D. 89-274 (10/25/1989), and P.D. 02-44 (4/9/2002). In P.D. 02-44, the Department concluded that the industrial manufacturing and processing exemption was applicable to an entity that produced electricity for sale but was not registered with the Virginia State Corporation Commission (SCC) as a public service corporation in Virginia. The Taxpayer would appear to be eligible for the manufacturing exemption because it is not a public service corporation and is constructing a manufacturing facility.
Wind Turbines, Foundations, and Cables
The Contractor intends to purchase wind turbines, foundations, and export and array cables. The Contractor also plans to purchase software that will be installed in an onshore substation to facilitate the operations of the wind farm. The wind turbines would be rotated by the wind, creating mechanical energy which is converted into electricity. The foundations would be put into the seabed and connected to the turbines. Array cables would be used to transfer electricity between the turbines. An export cable line would then carry the electricity from the wind turbines to an onshore interface cabinet and into the onshore substation.
Title 23 VAC 10-210-920 B 2 defines the term “used directly” as meaning “those activities that are an integral part of the production of a product, including all steps of an integrated process, but not including incidental activities such as general maintenance, management, and administration.” This regulation further states:
Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process.
Wind Farm Equipment
Based on the information provided, the wind turbines, array cables, and export cables will be used directly in the production of electricity. Therefore, such equipment will be exempt from retail sales and use tax under the manufacturing exemption. See P.D. 14-37 (3/19/2014).
Wind Farm Support Structures
The Department has issued several public documents that address supports for production machinery. In P.D. 11-8 (1/20/2011), the steel supports that served as legs to sustain the conveyor systems above ground level and rested upon foundations that were anchored to the ground. The conveyor systems could not function without the steel supports. The Department determined that the steel legs were a component part of the exempt conveyor systems. As such, the steel legs were used directly in an exempt processing activity and qualified for exemption from the sales and use tax. In P.D. 91-183 (8/26/1991), the Department determined that if freestanding steel legs or other supporting structures become a component part of the machinery if (1) they are attached to exempt machinery, (2) they are used solely to support exempt machinery, and (3) the machinery cannot be operated without the supports, the steel or other supporting structures. Based on this criteria, the foundations would likely qualify for the manufacturing exemption.
Software
The Contractor represents that the software it would install on servers located at the onshore substation would control the operation of the wind turbines. Title 23 VAC 10-210-920 C 2 addresses the use of computer systems in manufacturing production. Computer hardware and software used to direct or control a production line and/or quality control operations is exempt. By contrast, computer hardware and software used to monitor production operations including computers used to produce production reports, make production information available to plant personnel, and monitor the efficiency of production machinery are deemed to be administrative in nature and are taxable.
The Contractor states that the software would be used to both monitor and control the turbines. A decision as to whether the software would be exempt would depend on the preponderance of the software’s use. If the preponderance of the use is for monitoring, then it will not be exempt. Likewise, it will be completely exempt if the preponderance of use is to control the turbines. See 23 VAC 10-210-920 D. The Contractor may wish to refer to P.D. 07-173 (11/14/2007) and P.D. 12-118 (7/23/2012) for more information regarding the application of the sales and use tax to computer software used by manufacturers and industrial processors.
The Department currently requires consumers to issue Form ST-11A to make exempt purchases of qualifying pollution control equipment, machinery, and other tangible personal property from vendors. Consumers must apply to the Department for the Form ST-11A. In order to obtain this certification of exemption, an applicant should submit a written request to the Department on its business letterhead and provide the required information. For more information about Form ST-11A, please call our Contact Center at *****.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy and Legal Affairs, Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
Kristin L. Collins
Deputy Tax Commissioner
Commonwealth of Virginia
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Kristin Collins, Deputy Tax Commissioner, the authority to sign for me any and all rulings, appeals, offers in compromise, and penalty waivers in any instance where a conflict of interest may exist with a taxpayer. This authority shall be in effect from the date signed until revoked.
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/2085.B