Document Number
85-208
Tax Type
Retail Sales and Use Tax
Description
Oil refinery; Boiler chemicals and heating fuel storage
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
10-31-1985


  • October 31, 1985

    RE: §58.1-1821 Application/Sales and Use Tax


    Dear ****

    This will reply to your letter of October 22, 1984, in which you submit an application for correction of sales and use tax assessed to ***** as the result of a recent audit.

    FACTS

    ***** is engaged in the operation of an oil refinery. A recent audit of ***** produced an assessment for the failure. to remit the sales and use tax on purchases of water treatment chemicals, corrosion chemicals, corrosion inhibitors, and fuel used to heat refined oil so that it might be brought out of storage tanks for delivery to customers. ***** contests this assessment, contending that water treatment chemicals, corrosion chemicals, and corrosion inhibitors are indispensable to refining fuel as their use is necessary to various refinery machinery in operation. In addition, ***** contends that the heating fuel in question is an integral part of the production process as defined by departmental regulations and is therefore exempt from tax.

    DETERMINATION

    Section 58.1-608.1 of the Code of Virginia provides an exemption from the sales and use tax for the following items of tangible personal property:
      • ...industrial materials for future...refining...into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product...(and) industrial materials that are coated upon or impregnated into the product at any stage of its...refining...for resale...(and) machinery or tools or repair parts therefore or replacements thereof, fuel, power, and energy, or supplies, used directly in...refining...of products for sale or resale...

    The instant application must be reviewed in light of the above statute. The statute exempts from tax industrial materials that are integrated into the production process or into the product itself and also equipment, tools, power sources, and supplies used directly in producing tangible personal property for sale.

    The items in question and their disposition for the purposes of this application follow below:
      • (1) The water treatment chemicals in question are used to remove magnesium, dissolved oxygen, calcium carbonate, brine, and other minerals from boilers which produce steam, the primary source of heat for the refining process. In most instances, steam is condensed upon one side of heat exchanger, transferring heat to the process stream on the other side. Steam used in this manner is recovered in the form of water and pumped back to boilers to be condensed into steam again. Because some water is lost in the process, river water containing various minerals is added to replace the amount lost. The chemicals in question are added to remove such minerals from the river water; otherwise such minerals might corrode or otherwise damage boilers, pipes, or other refinery systems, causing a shutdown of the refining process. In some instances, steam is also added directly into process streams, providing heat directly to production rather than indirectly as with heat exchanger. In these instances, water recovered from the process is also chemically treated prior to its condensation back into steam.
          • As stated in Section 630-10-63 of the Virginia Retail Sales and Use Tax Regulations, the concept of the integrated refining exemption set forth in Virginia Code Section 58.1-602.9 provides an exemption for "subprocessing activities which produce tangible personal property used in the main (refining)...activity. Thus, boilers used to produce steam, an exempt energy source, are exempt from the tax in this case. However, it does not automatically follow that the water treatment chemicals in question are likewise exempt.
          • The definition of direct use found in Virginia Code Section 58.1-6O2.22 refers only to "those activities which are an integral part of the production of a product... but not... ancillary activities such as general maintenance" (emphasis added). Furthermore, the Virginia Supreme Court opined in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973) that under the concept of direct use "convenient or facilitative items are...not exempt" as well as "items which are essential to the operation of a business but not an immediate part of actual production." Thus, the fact that the usage of an item might be required by practical necessity does not in itself create an exemption here.
          • Based upon the information before me, I see no evidence that the water treatment chemicals in question are used directly in refining process. The chemicals do not enter into the refining process stream; rather, they remove undesirable ingredients from water to prevent corrosion of items used directly in the refining process. As such, the chemicals serve a general maintenance function, taxable under Virginia Code Section 58.1-602.22. An identical result was reached with respect to boiler chemicals by the Virginia Supreme Court in Webster Brick v. Department, 219 Va. 81, 245 5.E.2d 252 (1978).
      • (2) Corrosion Chemicals. Corrosion chemicals are used in the process stream of the refinery to remove ammonia and salt deposits from the process stream and the product itself. As these chemicals continue through the process stream, they mix with the water in the product being produced and fall out leaving just the end product. Without the use of corrosion chemicals the end product of the refining process would be tainted and the production process would eventually halt due to corrosion.

        While corrosion chemicals serve a role in the general maintenance of equipment, a taxable activity under the Webster Brick opinion, they also serve to guarantee the integrity of *****'s product and are an immediate part of the refining process. Accordingly, such chemicals are exempt under the used directly concept.
      • (3) Corrosion Inhibitors. Corrosion inhibitors are used in a similar manner as corrosion chemicals, to remove hydrochloric acid formed in the processing of gasoline. The inhibitors both slow down corrosion processes and purify the end product of the production process.
          • Just as corrosion chemicals guarantee the integrity of ***** product and touch directly on the production process, corrosion inhibitors are used directly in the production of gasoline.
      • (4) Heating Fuel. Fuel is used to heat certain products sold by ***** to promote ease of handling. Specifically, certain refinery products are required to be heated in order to be pumped out of refinery site storage tanks for delivery to customers.
          • Virginia Code Section 58.1-602.9 sets for the beginning and ending point of the refining process:
              • "Refining:...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.
      • Virginia Retail Sales and Use Tax Regulation §630-10-63 on manufacturing (including refining) is completely consistent with the above statute in that the refining exemption ends with the storage of finished products at the refinery site. Accordingly, fuel used to heat finished products already in storage is taxable to *****. However, it is my impression based on our auditor's records that the fuel in question is not used in heating products held for sale, but rather is used in providing services for a particular customer. The service described by our auditor involves the delivery of fuel oil belonging to the customer to ***** river dock, the heating of that oil by ***** and the transfer of the heated oil through pipelines to the customer's storage tanks. Such use of heating fuel is obviously outside of the refining exemption and as ***** is providing a service it is the taxable user or consumer of the heating fuel.

    Based upon the foregoing, the assessment issued to ***** shall be revised to delete corrosion chemicals and. inhibitors; however, the assessment as it relates to water treatment chemicals, heating fuel, and other tangible personal property will remain unchanged. Please advise within thirty days if you would like to arrange a meeting to discuss my determination in this matter.

    Sincerely,

    W. H. Forst
    Tax Commissioner

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46