Tax Type
Retail Sales and Use Tax
Description
Scrap metal processor; Equipment and maintenance supplies
Topic
Taxability of Persons and Transactions
Date Issued
09-04-1985
September 4, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of January 15, 1985, on behalf of ***** (Taxpayer), seeking adjustment of an audit assessment for the period July 1, 1981 through May 31, 1984.
Facts
Taxpayer is in the business of processing scrap metal. In connection with such business, taxpayer purchased the following fixed assets: an energy management system, rebuilt crane parts, Bobcat loaders, scrapped equipment, skip buckets, materials used for shredder roof repairs, and fencing. Taxpayer argues that these fixed assets were used directly and exclusively in its processing business and should therefore be exempt from the tax under §58.1-6O8(1) of the Virginia Code. In connection with such business Taxpayer also operates a fleet of trucks, and maintains that the maintenance and repair of such trucks should be exempt, under the Wellmore Coal Corporation case.
Taxpayer also maintains that certain oil products used or consumed in its equipment, machinery and trucks should be similarly exempt under Wellmore. Furthermore, Taxpayer argues that all of its equipment repair and supply expenses should be exempt under the manufacturing exemption cited above. Lastly, Taxpayer contends that the sample period used by the auditor in estimating its total sales of railroad construction materials is unrepresentative of actual sales.
The determination which follows is based in part on the results of a meeting held on June 7, 1985, between representatives of ***** and members of my staff.
Determination
Fixed Assets:
The energy management system as described by Taxpayer is used solely in the operation of its shredder to regulate energy surges that could be harmful to its proper operation and to conserve electricity. This system is housed completely within the shredder. building, but is not an actual part of the shredder itself. §58.1-608(1) of the Code, exempts from the sales and use tax, "machinery, tools or repair parts, fuel, power, energy, or supplies used directly in manufacturing or processing". (Emphasis added).
§63O-10-63 of the Virginia Sales and Use Tax Regulations defines "used directly" as, "those activities that are an integral part of the production of a product..., but not including incidental activities such as general maintenance, management and administration."
While the energy management system described in the present case is arguably essential to the proper functioning of Taxpayer's shredder, it is not such an immediate part of actual production as would justify exemption from the tax under §58.1-608(1). Rather such system is designed and used to facilitate the proper functioning of Taxpayer's exempt machinery and is not immediately involved in the shredding process itself.
Taxpayer also contends that its purchases of rebuilt crane parts should qualify for the industrial production exemption. However, based on information exchanged at the above referenced meeting with the Department it was found that Taxpayer's cranes were used in both industrial production and distribution activities.
Prior to July 1, 1984, if a single item of tangible personal property was used both directly and indirectly in industrial activities, the department would prorate the sales and use tax between such direct and indirect uses. However, as of July l, 1984, such property will be totally exempt from the tax if the preponderance of its use is in exempt production activities". §63O-10-63(D), Virginia Sales and Use Tax Regulations.
Therefore, I will consider adjusting the audit in accordance with the above referenced policies, upon receipt of supportive documentation which details the direct versus indirect industrial uses of such cranes. (i.e, I will prorate the exempt versus non-exempt uses of such rebuilt crane parts purchased prior to July 1, 1984, and hold either exempt or non-exempt all of such purchases made from July 1, 1984 through the end of the audit period, based on the preponderance of use test stated above.)
For example, taxpayer's rebuilt crane parts will be considered to be used directly in production when "used on the plant site, to unload raw materials or to convey raw materials to storage or from storage to the production line, to convey products from one step of production to another, or to convey finished products to packaging or warehouse areas." §63O-10-63(C)(2), Virginia Retail Sales and Use Tax Regulations, 1985. Conversely, such rebuilt crane parts will not be considered to be used directly in exempt production activities when they are not used at the plant site, when "used to transport raw materials to the plant site", or when used in non-exempt "distribution" activities. "Distribution" is defined in the Regulations as "the transport or conveyance of products after the completion of production, [and] includes the storage of product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale." §63O-10-63(C)(3).
Furthermore, I will consider adjusting the audit on the same basis upon receipt of similar documentation regarding the direct versus indirect industrial uses of the Taxpayer's Bobcat loaders and skip buckets.
Pursuant to the above referenced meeting, it is the department s understanding that the scrapped equipment which was held taxable in the audit was originally capitalized by Taxpayer and then, that which was found to be useless was put into scrap inventory, eventually destined for scrap processing. It is our further understanding that Taxpayer is unable to produce detailed records showing what percentage of such equipment was found to be useless scrap inventory. Therefore, in the absence of such supportive documentation, all of such scrapped equipment was correctly held taxable in the audit.
Taxpayer further asserts that certain materials purchased for shredder building roof repairs should qualify for exemption from the tax. However, inasmuch as such building is not an actual part of the shredder itself, materials used in its repair do not qualify for the industrial production exemption from the sales and use tax. §63O-10-63(c)(2) of the Regulations specifically provides that "construction materials such as concrete, structural steel, and roofing which become permanently incorporated into the production plant...and structures housing machinery are not used directly in manufacturing and processing and are subject to the tax."
Similarly, the fencing purchased for use around Taxpayer's chemical lab is not used directly in manufacturing and processing and is therefore subject to the tax. While the tax should have been collected by the vendor of such fencing at the point of sale and/or installation of the fencing, in the absence of such collection, Taxpayer is deemed liable for the payment of use tax on such fencing.
Trucking Maintenance, Operations and Oil Products Expenses:
100% of the Taxpayer's trucking maintenance and operations expenses and 15% of its oil products expenses were allocated to taxable "distribution" activities in the audit. It is the department's understanding that Taxpayer's trucks are used predominantly over the road and only a small portion of the time in its processing yard. Taxpayer claims that all of its trucking expenses should be exempt from the tax on the authority of Department of Taxation v. Wellmore Coal Corp, 228 Va. 149 (1984). However, the trucks in Wellmore were used to transport mined products between production sites of a single taxpayer and not between a customer and a taxpayer, as in this case. Taxpayer further claims that the 15% allocation of its oil products expenses to non-exempt distribution should also be exempt from the tax. Based on the position stated above with reference to the trucking expenses and the lack of any showing of arbitrariness on the part of the auditor in selecting the allocation percentage, I find no basis at this time to adjust the audit on this issue. However, if Taxpayer can provide supportive documentation similar to that requested with regard to the rebuilt crane parts, I will consider adjusting the audit on the same basis announced above.
Equipment Repair & Supply Expenses:
Taxpayer argues, as above with regard to the oil products, that the auditors 15% allocation to non-exempt distribution activities should be exempt from the tax. In accordance with all of the above stated with regard to the trucking maintenance and operations expenses and the oil products expenses, I will consider adjustment of the audit on this issue on the same basis.
Railroad Construction Contracts:
Taxpayer states, that it has documentation available which supports its position that the sample period chosen by the auditor in deriving the assessment amount on this issue was not a representative period.
If taxpayer can show that the period chosen was not a representative one, I will consider adjusting the audit on this issue. Taxpayer should contact the Technical Services Section of the department (address set out below), to arrange for a meeting between the auditor in this case and Taxpayer's accounting department to discuss this issue, within thirty days of this letter.
Therefore, based on all of the foregoing, I agree to consider adjustment of the audit on the issues indicated above upon receipt of all of the requested documentation within ninety (9O) days of this letter. Such documentation should be sent to the Department of Taxation, Technical Services Section, Post Office Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of January 15, 1985, on behalf of ***** (Taxpayer), seeking adjustment of an audit assessment for the period July 1, 1981 through May 31, 1984.
Facts
Taxpayer is in the business of processing scrap metal. In connection with such business, taxpayer purchased the following fixed assets: an energy management system, rebuilt crane parts, Bobcat loaders, scrapped equipment, skip buckets, materials used for shredder roof repairs, and fencing. Taxpayer argues that these fixed assets were used directly and exclusively in its processing business and should therefore be exempt from the tax under §58.1-6O8(1) of the Virginia Code. In connection with such business Taxpayer also operates a fleet of trucks, and maintains that the maintenance and repair of such trucks should be exempt, under the Wellmore Coal Corporation case.
Taxpayer also maintains that certain oil products used or consumed in its equipment, machinery and trucks should be similarly exempt under Wellmore. Furthermore, Taxpayer argues that all of its equipment repair and supply expenses should be exempt under the manufacturing exemption cited above. Lastly, Taxpayer contends that the sample period used by the auditor in estimating its total sales of railroad construction materials is unrepresentative of actual sales.
The determination which follows is based in part on the results of a meeting held on June 7, 1985, between representatives of ***** and members of my staff.
Determination
Fixed Assets:
The energy management system as described by Taxpayer is used solely in the operation of its shredder to regulate energy surges that could be harmful to its proper operation and to conserve electricity. This system is housed completely within the shredder. building, but is not an actual part of the shredder itself. §58.1-608(1) of the Code, exempts from the sales and use tax, "machinery, tools or repair parts, fuel, power, energy, or supplies used directly in manufacturing or processing". (Emphasis added).
§63O-10-63 of the Virginia Sales and Use Tax Regulations defines "used directly" as, "those activities that are an integral part of the production of a product..., but not including incidental activities such as general maintenance, management and administration."
While the energy management system described in the present case is arguably essential to the proper functioning of Taxpayer's shredder, it is not such an immediate part of actual production as would justify exemption from the tax under §58.1-608(1). Rather such system is designed and used to facilitate the proper functioning of Taxpayer's exempt machinery and is not immediately involved in the shredding process itself.
Taxpayer also contends that its purchases of rebuilt crane parts should qualify for the industrial production exemption. However, based on information exchanged at the above referenced meeting with the Department it was found that Taxpayer's cranes were used in both industrial production and distribution activities.
Prior to July 1, 1984, if a single item of tangible personal property was used both directly and indirectly in industrial activities, the department would prorate the sales and use tax between such direct and indirect uses. However, as of July l, 1984, such property will be totally exempt from the tax if the preponderance of its use is in exempt production activities". §63O-10-63(D), Virginia Sales and Use Tax Regulations.
Therefore, I will consider adjusting the audit in accordance with the above referenced policies, upon receipt of supportive documentation which details the direct versus indirect industrial uses of such cranes. (i.e, I will prorate the exempt versus non-exempt uses of such rebuilt crane parts purchased prior to July 1, 1984, and hold either exempt or non-exempt all of such purchases made from July 1, 1984 through the end of the audit period, based on the preponderance of use test stated above.)
For example, taxpayer's rebuilt crane parts will be considered to be used directly in production when "used on the plant site, to unload raw materials or to convey raw materials to storage or from storage to the production line, to convey products from one step of production to another, or to convey finished products to packaging or warehouse areas." §63O-10-63(C)(2), Virginia Retail Sales and Use Tax Regulations, 1985. Conversely, such rebuilt crane parts will not be considered to be used directly in exempt production activities when they are not used at the plant site, when "used to transport raw materials to the plant site", or when used in non-exempt "distribution" activities. "Distribution" is defined in the Regulations as "the transport or conveyance of products after the completion of production, [and] includes the storage of product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale." §63O-10-63(C)(3).
Furthermore, I will consider adjusting the audit on the same basis upon receipt of similar documentation regarding the direct versus indirect industrial uses of the Taxpayer's Bobcat loaders and skip buckets.
Pursuant to the above referenced meeting, it is the department s understanding that the scrapped equipment which was held taxable in the audit was originally capitalized by Taxpayer and then, that which was found to be useless was put into scrap inventory, eventually destined for scrap processing. It is our further understanding that Taxpayer is unable to produce detailed records showing what percentage of such equipment was found to be useless scrap inventory. Therefore, in the absence of such supportive documentation, all of such scrapped equipment was correctly held taxable in the audit.
Taxpayer further asserts that certain materials purchased for shredder building roof repairs should qualify for exemption from the tax. However, inasmuch as such building is not an actual part of the shredder itself, materials used in its repair do not qualify for the industrial production exemption from the sales and use tax. §63O-10-63(c)(2) of the Regulations specifically provides that "construction materials such as concrete, structural steel, and roofing which become permanently incorporated into the production plant...and structures housing machinery are not used directly in manufacturing and processing and are subject to the tax."
Similarly, the fencing purchased for use around Taxpayer's chemical lab is not used directly in manufacturing and processing and is therefore subject to the tax. While the tax should have been collected by the vendor of such fencing at the point of sale and/or installation of the fencing, in the absence of such collection, Taxpayer is deemed liable for the payment of use tax on such fencing.
Trucking Maintenance, Operations and Oil Products Expenses:
100% of the Taxpayer's trucking maintenance and operations expenses and 15% of its oil products expenses were allocated to taxable "distribution" activities in the audit. It is the department's understanding that Taxpayer's trucks are used predominantly over the road and only a small portion of the time in its processing yard. Taxpayer claims that all of its trucking expenses should be exempt from the tax on the authority of Department of Taxation v. Wellmore Coal Corp, 228 Va. 149 (1984). However, the trucks in Wellmore were used to transport mined products between production sites of a single taxpayer and not between a customer and a taxpayer, as in this case. Taxpayer further claims that the 15% allocation of its oil products expenses to non-exempt distribution should also be exempt from the tax. Based on the position stated above with reference to the trucking expenses and the lack of any showing of arbitrariness on the part of the auditor in selecting the allocation percentage, I find no basis at this time to adjust the audit on this issue. However, if Taxpayer can provide supportive documentation similar to that requested with regard to the rebuilt crane parts, I will consider adjusting the audit on the same basis announced above.
Equipment Repair & Supply Expenses:
Taxpayer argues, as above with regard to the oil products, that the auditors 15% allocation to non-exempt distribution activities should be exempt from the tax. In accordance with all of the above stated with regard to the trucking maintenance and operations expenses and the oil products expenses, I will consider adjustment of the audit on this issue on the same basis.
Railroad Construction Contracts:
Taxpayer states, that it has documentation available which supports its position that the sample period chosen by the auditor in deriving the assessment amount on this issue was not a representative period.
If taxpayer can show that the period chosen was not a representative one, I will consider adjusting the audit on this issue. Taxpayer should contact the Technical Services Section of the department (address set out below), to arrange for a meeting between the auditor in this case and Taxpayer's accounting department to discuss this issue, within thirty days of this letter.
Therefore, based on all of the foregoing, I agree to consider adjustment of the audit on the issues indicated above upon receipt of all of the requested documentation within ninety (9O) days of this letter. Such documentation should be sent to the Department of Taxation, Technical Services Section, Post Office Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner