Tax Type
Retail Sales and Use Tax
Description
Taxable farm purchases; Materials affixed to real property
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
08-09-1984
August 9, 1984
Re: §58-1118 Application/Sales and Use Tax
Dear ****************
This will reply to your letter of September 16, 1983 in which you submit an application for correction of sales and use tax assessed to ***** for the period from December 1974 to September 1978.
FACTS
***** (hereinafter *****) is engaged in raising ducks for market. An audit of ***** for the period from December 1, 1974 through September 30, 1978 resulted in assessments for failure to remit the sales and use tax on various items of tangible personal property, including construction materials used in the erection of duck sheds, electrical systems (panel boxes, junction boxes, wires, lugs, meters, and strap hangers) used in the corporation's processing building, steel beams and pipe columns used to support production machinery, and a radio telephone system installed in farm vehicles.
***** contests the imposition of the tax upon the items listed above and requests relief accordingly.
DETERMINATION
During the period of the instant audit, § 58-441.6(c) of the Code of Virginia provided the following exemption from the sales and use tax:
The terms "sale at retail," "lease or rental," "distribution," "use," "storage," and "consumption" shall not include...commercial feeds, seeds, plants, fertilizers, liming materials, breeding and other livestock, semen, breeding fees, baby chicks, turkey poults, agricultural chemicals, fuel for drying and curing crops, baler twine, containers for fruits and vegetables, or farm machinery, and all other agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production for market.
The department's consistent interpretation of that statute was that an exemption from the tax was provided to farmers only on their purchases of the items specifically set forth in the statute and other agricultural supplies provided that such items and supplies retained their character as tangible personal property. The department held that tangible personal property which became affixed to real property or otherwise lost its identity as tangible personal property was subject to the tax.
As you know, the department's interpretation of the above statute was validated by the Circuit Court of ***** County in ***** v. Department of Taxation (1975), in which that court ruled that various items used by ********"constitute real property and that said items are therefore not entitled to... the 'agricultural exemption' of § 58-441.6(c)." Furthermore, it was not until a 1980 statutory change, retroactively made effective January 1, 1979, that the "agricultural" exemption was expanded to include "all other tangible personal property, except for structural construction materials, necessary for use in agricultural production for market and sold to or purchased by a farmer to be affixed to real property owned or leased by a farmer." The 1980 statutory change would therefore seem to further validate the department's previous stance on the realty issue inasmuch as a change in the law is normally presumed when new provisions are added to prior legislation by amendatory act (See Boyd v. Commonwealth, 216 Va. 16 (1975)).
In the instant case, we find that several of the items contested by ***** in some manner became attached to realty and may actually have taken on the status of real property. In determining whether an item of tangible personal property loses its identity as such, taking on the status of real property, it is instructive to study the test set forth by the Virginia Supreme Court in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1969):
The classification of property as real estate or as tangible personal property is to be determined by the law of fixtures...three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are:
(1) annexation of the property to the realty,
(2) adaption to the use or purpose to which that part of the realty with which the property is connected is appropriated, and
(3) the intention of the parties...
The intention of the party making the annexation is the chief test to be considered...."
Based upon the information before me and the criteria set forth by the Court in Transcontinental, supra, I must conclude that the construction materials, electrical systems, steel beams, and pipe supports contested herein are indeed subject to the tax inasmuch as such items have lost their identity as tangible personal property.
The construction materials in question include nails, sheathing, insulation, plywood, etc. used to construct or improve duck houses. Such structures constitute real property; consequently, items which become a component part of such structures would take on the identity of real property.
With respect to the electrical systems in question (panel boxes, junction boxes, wires, lugs, meters, strap hangers, etc.), I find that such items became affixed to realty and were adapted to the purpose for which****** processing building was used. Further, it was the intention of ***** to affix such systems in such a manner as to provide power for the building with outlets in various locations.
Lastly, the pipe columns and steel beams used by ***** in its processing building were also affixed to realty. These items support machinery and pipes used by ***** but are not component parts of such machinery and pipes. These items are also specifically adapted to ***** processing building in order to support machinery and pipes and although such items may be removed, they were not intended to be portable or easily removed.
With respect to ***** radio-telephone systems installed in farm vehicles, I must conclude that such machinery is not used in agricultural production for market but rather is used merely as an administrative convenience.
Therefore, based on the foregoing, I find no basis for relief of tax and interest assessed to ***** in this case. I do find basis though for the relief of penalty assessed; the assessment issued to ***** will be revised accordingly.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner