Tax Type
Retail Sales and Use Tax
Description
Industrial Materials; Lease of Rail Cars
Topic
Taxability of Persons and Transactions
Date Issued
12-20-1991
December 20, 1991
Re: §58.1-1821 Application: Sales and Use Tax
Dear*********************
This will reply to your letter seeking correction of a sales and use tax assessment for*********** ("the Taxpayer").
FACTS
The Taxpayer is a manufacturer of peanut butter. An audit of the Taxpayer for the period March, 1987 through December, 1989 produced an assessment for its failure to remit the sales and use tax on purchases and leases of tangible personal property.
The Taxpayer contests the assessment of tax on leases of rail cars used to transport peanuts from out-of-state locations to the Taxpayer's plant site. The rail cars are also used to store the peanuts at the plant site until they are required for use in the manufacturing process. The Taxpayer contends the lease of the rail cars is exempt under Virginia Regulation (VR) 630-10-63 (Manufacturing and Processing) as tangible personal property used in the handling and storage of raw materials.
DETERMINATION
Unlike the storage bins determined exempt in the ruling cited by the Taxpayer, P.D. 87-187 (7/20/87), the rail cars at issue here are not used only in exempt activities at a plant site; rather, they are used in both taxable and exempt activities. Under §C(2) of VR 630-10-63, the rail cars are taxable when used to transport the raw materials to a plant site; however, the rail cars are exempt when used to store the raw materials at the plant site.
The application of the sales and use tax to tangible personal property used in both taxable and exempt activities by an industrial manufacturer is set forth in §D of the above regulation which provides:
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- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt Production activities.
- When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from tax if the preponderance of its use is in exempt Production activities.
For purposes of determining the percentage of time used in taxable versus exempt activities, the amount of time spent in transport or stationary time spent away from the plant site will be considered time the rail cars are used in a taxable function. Only the amount of stationary time spent at the plant site, while storing peanuts for future use in the manufacturing process, will be considered use in an exempt activity.
Based on information supplied by the department's auditor, it is my understanding that the rail cars are used predominately in the taxable transport, rather than the exempt storage of the raw materials, and would therefore be subject to the tax. However, I am willing to provide the Taxpayer with additional time to furnish documentation to support its claim as to exempt usage. Such documentation should be submitted to the department's Office Services Division, Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282 within 45 days.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/4177E
Rulings of the Tax Commissioner