Tax Type
Retail Sales and Use Tax
Description
Fertilizer mixing and spreading equipment; Storage tanks; Manufacturer
Topic
Taxability of Persons and Transactions
Date Issued
03-14-1985
March 14, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter od December 6, 1984 in which you submit an application for correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
***** (Taxpayer) is engaged in the production of fertilizer and lime at a central plant site and the spreading of fertilizer and lime for customers. A recent audit of the taxpayer produced an assessment for its failure to remit the sales and use tax on purchases of equipment used to mix and spread fertilizer onto fields and upon tanks used both to store raw materials and finished products.
The taxpayer contests such assessment, contending that its fertilizer mixing and spreading equipment is used directly in industrial processing and is therefore exempt from the tax and that its storage tanks are similarly used.
DETERMINATION
The two issues in question here will be discussed separately below:
Fertilizer Mixing and Spreading Equipment. The equipment in question, referred to by the taxpayer as "floaters", consists of a mixing tank with sprayer arms and is used to spray fertilizer and other materials on fields.
It is asserted by the taxpayer that its floaters are used directly in industrial processing as fertilizer, pesticides, herbicides, and other chemicals are mixed within the units prior to spreading. It is noted that such mixing cannot take place at the taxpayer's central plant site as ingredients are generally custom mixed for particular fields and the mixing of certain ingredients in the central plant mixer would contaminate other orders. The department's auditor included floaters within the instant audit as the processing performed by use of the floaters was carried on off of the taxpayer's plant site.
As "processing" only requires that a "product undergo a treatment rendering the product more marketable or useful," the blending of various ingredients to produce fertilizer is an industrial process entitled to exemption from the sales and use tax. Commonwealth v. Orange-Madison Coop; 220 Va. 655, 261 S.E. 2d 532 (1980), The blending of materials in floaters does occur off of the taxpayer's central plant site; however, such blending falls under the definition of processing set forth by the court in Orange-Madison. Therefore, floaters should be deemed used directly in industrial processing provided that the materials blended within them are sold to customers and not used in providing a service. In this case, floaters may be analogized to concrete mixer trucks, the application of the sales and use tax to which is discussed in Section 630-10-24.2 of the Virginia Retail Sales and Use Tax Regulations:
A concrete mixing unit mounted on a truck is classified as machinery used directly in manufacturing and such mining unit may be purchased free of the sales and use tax provided the concrete is produced for sale or resale...
While floaters qualify as Industrial processing machinery, the determination whether the taxpayer's floaters qualify for exemption from the tax depends on the manner the taxpayer's charges for fertilizer and spreading were structured Commonwealth v. Pounding Mill Quarry, 215 Va. 647, 212 S.E. 2d 428 (1975)
The Virginia Supreme Court opined in Pounding Mill that the spreading of lime for a per-acre charge was a nontaxable service transaction when charges for transporting and spreading lime were not separate from charges for the lime itself, 215 Va. at 652, Therefore, if the taxpayer provided fertilizer and other materials for a flat per acre or similar charge, it was providing a service, and its floaters would be taxable as tangible personal property used in rendering the service. However, if the taxpayer was selling fertilizer and similar materials and making 2 separate charge for spreading, its floaters would be deemed used directly in industrial processing of products for sale or resale.
If the taxpayer engaged. in both types of transactions. during the audit period, the assessment with respect to floaters will be prorated to the percentage that the number of service. transactions bears. to all transactions during the period. Such information should be provided to the department's Technical Services Section by the taxpayer within the next thirty days in order for the assessment to be properly adjusted, if necessary.
After June 30, 1984, floaters used in both types of transactions will be deemed fully taxable if used fifty percent or more of the time in service transactions or fully exempt if used more than. fifty percent of the time in spreading materials sold at retail. This results from a July 1, 1984 change in the law.
Storage Tanks.
Section 58.1-608.1(c) of the Code of Virginia exempts from the sales and use tax "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing." In interpreting statutory tax exemptions, the Virginia Supreme Court has adopted a rule of strict construction whereby all doubts as to exemption are resolved against exemption. Commonwealth v. Research Analysis Corporation, 214 Va. 161, 198 S.E. 2d 622 (1973).
Under the general rule of strict construction established by the court, an exemption must be denied to storage tanks used by the taxpayer as such tanks do not constitute machinery, tools, etc. as exempted under the above statute. An identical conclusion was reached by the Virginia Supreme Court in Webster Brick Company v. Department, 219 Va. 81, 245 S.E. 2d 252 (1978) in determining the application of the tax to oil storage tanks. The court reached this conclusion even though the oil inside the tanks was itself used directly in a manufacturing process Section 630-10-63 the Virginia Retail Sales and Use Tax Regulations (copy enclosed) is consistent with the court's opinion, stating that "[t]anks used to store exempt fuel and other tangible personal property (are taxable) except that tanks and other devices which constitute machinery are exempt."
Therefore, based on the foregoing, the taxpayer's storage tanks must be deemed taxable unless it can be shown that they constitute machinery used directly in processing.
Sincerely,
W. H. Forst
State Tax Commissioner
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter od December 6, 1984 in which you submit an application for correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
***** (Taxpayer) is engaged in the production of fertilizer and lime at a central plant site and the spreading of fertilizer and lime for customers. A recent audit of the taxpayer produced an assessment for its failure to remit the sales and use tax on purchases of equipment used to mix and spread fertilizer onto fields and upon tanks used both to store raw materials and finished products.
The taxpayer contests such assessment, contending that its fertilizer mixing and spreading equipment is used directly in industrial processing and is therefore exempt from the tax and that its storage tanks are similarly used.
DETERMINATION
The two issues in question here will be discussed separately below:
Fertilizer Mixing and Spreading Equipment. The equipment in question, referred to by the taxpayer as "floaters", consists of a mixing tank with sprayer arms and is used to spray fertilizer and other materials on fields.
It is asserted by the taxpayer that its floaters are used directly in industrial processing as fertilizer, pesticides, herbicides, and other chemicals are mixed within the units prior to spreading. It is noted that such mixing cannot take place at the taxpayer's central plant site as ingredients are generally custom mixed for particular fields and the mixing of certain ingredients in the central plant mixer would contaminate other orders. The department's auditor included floaters within the instant audit as the processing performed by use of the floaters was carried on off of the taxpayer's plant site.
As "processing" only requires that a "product undergo a treatment rendering the product more marketable or useful," the blending of various ingredients to produce fertilizer is an industrial process entitled to exemption from the sales and use tax. Commonwealth v. Orange-Madison Coop; 220 Va. 655, 261 S.E. 2d 532 (1980), The blending of materials in floaters does occur off of the taxpayer's central plant site; however, such blending falls under the definition of processing set forth by the court in Orange-Madison. Therefore, floaters should be deemed used directly in industrial processing provided that the materials blended within them are sold to customers and not used in providing a service. In this case, floaters may be analogized to concrete mixer trucks, the application of the sales and use tax to which is discussed in Section 630-10-24.2 of the Virginia Retail Sales and Use Tax Regulations:
A concrete mixing unit mounted on a truck is classified as machinery used directly in manufacturing and such mining unit may be purchased free of the sales and use tax provided the concrete is produced for sale or resale...
While floaters qualify as Industrial processing machinery, the determination whether the taxpayer's floaters qualify for exemption from the tax depends on the manner the taxpayer's charges for fertilizer and spreading were structured Commonwealth v. Pounding Mill Quarry, 215 Va. 647, 212 S.E. 2d 428 (1975)
The Virginia Supreme Court opined in Pounding Mill that the spreading of lime for a per-acre charge was a nontaxable service transaction when charges for transporting and spreading lime were not separate from charges for the lime itself, 215 Va. at 652, Therefore, if the taxpayer provided fertilizer and other materials for a flat per acre or similar charge, it was providing a service, and its floaters would be taxable as tangible personal property used in rendering the service. However, if the taxpayer was selling fertilizer and similar materials and making 2 separate charge for spreading, its floaters would be deemed used directly in industrial processing of products for sale or resale.
If the taxpayer engaged. in both types of transactions. during the audit period, the assessment with respect to floaters will be prorated to the percentage that the number of service. transactions bears. to all transactions during the period. Such information should be provided to the department's Technical Services Section by the taxpayer within the next thirty days in order for the assessment to be properly adjusted, if necessary.
After June 30, 1984, floaters used in both types of transactions will be deemed fully taxable if used fifty percent or more of the time in service transactions or fully exempt if used more than. fifty percent of the time in spreading materials sold at retail. This results from a July 1, 1984 change in the law.
Storage Tanks.
Section 58.1-608.1(c) of the Code of Virginia exempts from the sales and use tax "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing." In interpreting statutory tax exemptions, the Virginia Supreme Court has adopted a rule of strict construction whereby all doubts as to exemption are resolved against exemption. Commonwealth v. Research Analysis Corporation, 214 Va. 161, 198 S.E. 2d 622 (1973).
Under the general rule of strict construction established by the court, an exemption must be denied to storage tanks used by the taxpayer as such tanks do not constitute machinery, tools, etc. as exempted under the above statute. An identical conclusion was reached by the Virginia Supreme Court in Webster Brick Company v. Department, 219 Va. 81, 245 S.E. 2d 252 (1978) in determining the application of the tax to oil storage tanks. The court reached this conclusion even though the oil inside the tanks was itself used directly in a manufacturing process Section 630-10-63 the Virginia Retail Sales and Use Tax Regulations (copy enclosed) is consistent with the court's opinion, stating that "[t]anks used to store exempt fuel and other tangible personal property (are taxable) except that tanks and other devices which constitute machinery are exempt."
Therefore, based on the foregoing, the taxpayer's storage tanks must be deemed taxable unless it can be shown that they constitute machinery used directly in processing.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner