Tax Type
Retail Sales and Use Tax
Description
Ferry and barge repairs
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
12-23-1988
December 23, 1988
Re: §58.1-1821 Application/ Sales and Use Tax
Dear*****************
This will reply to your letter of October 26, 1988 seeking correction of a sales and use tax assessment issued to ************** (taxpayer), for the period May, 1984 through April, 1987.
FACTS
In connection with its ship repair business, the taxpayer was recently audited and held liable for the tax on certain untaxed repairs performed at its ***********Virginia facility. The taxpayer contests the assessment on repairs to several ships or vessels which it contends are used principally in interstate commerce, and which therefore qualify for exemption from the tax under Virginia Code §58.1-608(11).
The taxpayer also contends that repairs to several ships qualify for the manufacturing exemption since they are used in transporting raw materials to a manufacturing plant, or in transporting partially processed materials between processing plants of a manufacturer.
The taxpayer also contests the assessment on its repairs to a particular vessel which it contends qualify for the governmental exemption from the sales and use tax in Virginia Code §58.1-608(18).
DETERMINATION
I find basis for correction of the assessment on repairs to ferries operated by the ********* and barges operated by the ************* which have been shown by the taxpayer to be used principally in interstate commerce.
Virginia Code §58.1-608(1) 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, manufacturing, refining, mining or conversion ... of products for sale or resale." (Emphasis added).
The term "used directly" for purposes of the manufacturing exemption refers to "those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process... [but does not include] [t]angible personal property used in activities conducted away from the plant site or used to convey products or materials between two plant sites." (See Virginia Retail Sales and Use Tax Regulation (VR) 630-10-63.B.2., copy enclosed).
Tugboats and barges used in transporting raw materials to a plant site, and processed materials between different plant sites of a manufacturer located entirely in another state, are not used directly in manufacturing under the regulation provision cited immediately above. Therefore, repairs to such tugboats and barges by the taxpayer do not qualify for tax exemption.
In addition, for the reasons stated in the enclosed November 28, 1986 ruling of the department, I find no basis for extension of the governmental exemption in Virginia Code §58.1-608(18) to repairs performed by the taxpayer on a U.S. Maritime Administration vessel. While the repairs were contracted for and paid by an independent contractor operating the vessel under the direct supervision and control of the Maritime Administration, the taxpayer has not shown that the contractor had the authority to directly bind the credit of the United States government in ordering such repairs. (See also, VR 630-10-45, and U.S. v. Forst, 442 F. Supp. 920, (1977), enclosed).
Furthermore, 46 U.S.C. §971 governing maritime liens, does not render the independent contractor in this case the agent of the government for purposes of binding the credit of the government in purchasing the contested repairs.
The audit will be revised in a manner consistent with the foregoing. However, the department will allow the taxpayer a period of 30 days in which to submit an offer in compromise in this matter under the provisions of Virginia Code §58.1-105. If such an offer is not received by the department within this time period, a revised Notice of Assessment based only on the changes noted in this letter will be issued to the taxpayer.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner