Tax Type
Retail Sales and Use Tax
Description
Coal mine operators
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
04-07-1982
April 7, 1982
Re: § 58-1118 Application for Correction: Sales Tax
Dear ****************
Reference is made to your January 17, 1980 application for correction of a sales and use tax assessment, the hearing held in Richmond on December 7, 1981 and your letter dated January 11, 1982 in which you furnished your comments on the Virginia Supreme Court decision in the case Commonwealth of Virginia v. Orange-Madison Cooperative Farm Service.
FACTS
Based on information furnished in your previous correspondence and at the hearing, ***********is engaged in independent analysis of coal. The analytical testing is done under contract primarily for brokers prior to export. Occasionally, analytical testing is performed for mine operators. The purpose of the testing is to advise the brokers of the proper blend of coal in order to meet the customer's specifications. ******** will provide a certification of the blend of coal after the testing is performed.
******* was audited for the period October 1, 1974 through June 30, 1980 and assessed use tax on purchases of tangible personal property on which no tax was previously paid. ********* contends that its operation is an integral part of industrial processing of coal for export and qualifies for exemption under Virginia Code § 58-441.6.
DETERMINATION
The first paragraph of Virginia Code §58-441.6 provides an exemption for "machinery or tools or repair parts...or supplies used directly in processing..." Processing by statute includes:
The production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site, and also includes equipment and supplies used for production line testing and quality control. (Virginia Code § 58-441.3(p))
In order to qualify for the industrial processing exemption set out in Virginia Code § 58-441.6, a taxpayer must meet two requirements. First the taxpayer must be processing a product for sale and secondly the taxpayer must be processing "in the industrial sense." It is the department's position that********does not meet the first requirement in that merely providing analytical testing of a product is not processing in itself as that term is set out in the Virginia Retail Sales and Use Tax Act. It is also our position that the language in the Orange-Madison decision which states that processing "requires that the product undergo a treatment rendering the product more marketable or useful" has no application to the operation of ******** in that treatment of a product requires more than testing a product to determine its quality. In the Orange-Madison case, the facts are quite different than the factual situation at issue. In Orange-Madison raw materials (corn, barley and wheat) were passed through a steam cooker where moisture was added and grains cracked. Several other ingredients such as soybean or peanut meal, vitamins, minerals, salt and liquid molasses were blended together to achieve a final product - feed - all of which is to be sold. In the case of ********samples of coal undergo analytical testing for brokers in order for them to show to the customer the blend of coal as certified by an independent testing laboratory. ******** does not perform any test or treatment to the coal which is ultimately exported. While the analytical testing may be necessary for the broker to market the coal, that function alone cannot be construed as processing for sales and use tax purposes.
Even if the operation of *******was considered processing, it must be processing "in the industrial sense' to qualify for exemption. In order to meet the industrial test the department has looked to several criteria, specifically the existence of a highly mechanized assembly line, plant size, inventory size, capital investment, and number of employees. Based on the information furnished the department, it would appear that ******* would not meet the industrial test.
The portion of Virginia Code § 58-441.3(p) providing an exemption for equipment and supplies used for production line testing and quantity control would also not have any application to the operation of This provision contains the requirement that production line testing be performed at the plant site. Independent testing of production line products performed outside the plant site would not qualify for exemption. The plant site requirement set out in Virginia Code § 58-441.3(p) has been upheld in the case Charlottesville Newspaper, Inc. T/A The Daily Progress v. Commonwealth of Virginia. This case was decided in the Circuit Court of the City of Charlottesville and the Virginia Supreme Court, finding no reversible error, refused the petition for appeal by the Commonwealth of Virginia.
We can find no exemption under the law applicable to the operation of *********** therefore, your application for correction is hereby denied.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner