92-235 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Pollution Control and Cleanup Equipment; Transport of Coal Processing Waste

Topic

Penalties and Interest

Taxability of Persons and Transactions

Date Issued

11-12-1992

November 12, 1992

Re: §58.1-1821 Application: Sales and Use Tax

Dear***************

This will reply to your letter of April 18, 1991 in which you seek relief of sales and use tax assessed to ******************(the Taxpayer) for the period of July, 1987 through June. 1990.

FACTS

The Taxpayer owns and operates a coal processing plant in Virginia. An integral part of the Taxpayer's process involves the removal and disposal of refuse that is a part of the mined coal in order to make the coal marketable. The refuse is transported to the dump site via conveyor belts and trucks. The trucks collect the refuse from the conveyors and immediately transport it to the dump site. The Taxpayer was assessed tax on the purchase of equipment used to excavate the dump site and equipment in use at the dump site. The Taxpayer is taking exception to the taxing of the pollution control equipment based on the recent certification by the State Water Pollution Control Board.

The Taxpayer is also taking exception to the application of tax on items, primarily diesel fuel, used in the transport of refuse from the plant site to the dump. The Taxpayer uses a conveyor system to transport the refuse from the processing plant to a hopper from which dump trucks transport the refuse to the dump site. The Taxpayer feels the transportation of the refuse from the processing plant to the dump site is exempt under Virginia Regulation (VR) 630-10-65.2(A)(2).

The Taxpayer is also taking exception to the sample method employed by the auditor in extrapolating the tax liability for the three year audit period. The Taxpayer feels the one year sample period used does not fairly represent the period under audit and the department lacks the statutory authority to use statistical sampling as a means of performing an audit.

Finally, the Taxpayer feels they have established good cause for failure to pay the tax assessed in the audit, and therefore request that penalty be waived as allowed under Virginia Regulation (VR) 630-10-80.

DETERMINATION

Pollution Control Equipment

VR 630-10-65.2(D) addresses the sales tax application of pollution control equipment as it pertains to the mining and mineral processing industry and states the following:

- Any property or facility which has been certified by the State Water Control Board or the State Air Pollution Control Board as used primarily for the purpose of preventing or abating air or water pollution is not subject to the tax. This is applicable to both real and tangible personal property. Only certified property or facilities qualify for exemption.

As can be seen from the above, in order for pollution control equipment to enjoy the sales and use tax exemption, such equipment must be certified by either the State Water Control Board or the State Air Pollution Control Board. At the time the audit was performed, certification had not been obtained for certain pollution control equipment held taxable in the audit. It is my understanding that the Taxpayer has now obtained certification from the State Water Control Board for several pieces of equipment held taxable in the audit. Upon verification of the pollution certification, the audit will be adjusted accordingly.

Based on comments from our audit staff, it is my understanding that some of the certified equipment in question may subsequently have been removed from the certified pollution control site or may no longer be used in pollution control activities. In either event, the equipment becomes subject to use tax at the point that exempt usage ceases. The tax is computed based on the sales price of the equipment, or if more than six months after the date of purchase, the equipment's fair market value.

Refuse Conveyance Systems

VR 630-10-65.2(A)(2) addresses transportation of waste product from the processing plant to the waste dump and states, in part, the following:

- Transportation of a waste product from the processing plant to a waste dump at the plant site is a part of production line quality control and is included in mineral processing. Systems used to transport the waste product from the production line at the processing plant to the dump will not be subject to the tax provided both of the following conditions are met: (1) the transportation to the dump is continuous and without interruption, i.e., the waste is not stored or stockpiled prior to conveyance; and, (2) the dump is located at the processing plant site. In order for a dump to be deemed located at the processing plant site, such dump must be connected to the processing plant via private transportation system entirely owned or leased by the processor.

In the case at hand, it has clearly been established that the dump site is located at the processing plant site, therefore, meeting the second condition set forth above. Based on the facts provided in your letter, the refuse comes to rest in the hopper only until another truck is available for transporting. It is also stated that the refuse remains in the hopper for a period of not longer than fifteen minutes. This leads us to the question of whether the transportation to the dump is "continuous and without interruption." While the refuse in question comes to rest in the hopper prior to being loaded on the trucks, I do not feel this constitutes a significant interruption in the flow of refuse from the processing plant to the dump site. Therefore, those items held taxable which are used in the conveyance of refuse from the processing plant to the dump site will be removed from the audit.

It should be pointed out that the exemption set forth above is only applicable to the actual conveyance of refuse to the dump site, and not to the haul roads over which the trucks travel. While the Virginia Supreme Court found "coal haul roads" used to transport mined materials for further processing to be exempt in Commonwealth v. Wellmore Coal, 228 Va. 149, 320 S.E.2d 509 (1984), this opinion is not applicable to "refuse haul roads" for the conveyance of refuse to on site dumps.

Sampling

Sampling is an audit technique of significant value that is widely used in the public and private sectors in all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.

The courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct and valid and that the burden of proof is upon the taxpayer to prove otherwise. As such, the taxpayer must demonstrate that the sample used is not representative of the audit period or that it is flawed in some other manner to invalidate the sample. In the case at hand, the Taxpayer has not presented any evidence to negate the validity of the sample used. The fact that the auditor sampled one full year of the three year audit period further supports the validity of the sample. Therefore, I find no basis for revising or extending the sample based on the information presented in the Taxpayer's letter.

Penalty

VR 630-10-80(C)(1) provides for the mandatory application of audit penalty and states, in part, the following:

- The application of penalty to audit deficiencies is mandatory, but its application may be waived at the discretion of the Tax Commissioner based upon the extent of a dealer's compliance with requirements for collection and payment of sales tax and requirements for payment of use tax or good cause... On a second or subsequent audit, a dealer is expected to demonstrate a higher degree of sales and use tax compliance. Penalty will not be waived on second or subsequent audits for other than exceptional mitigating circumstances.

Assessment of penalty on audits is determined by the level of compliance exhibited by the taxpayer. Compliance on second generation audits must meet 75% on sales and 50% on purchases.

Compliance on this audit, the second audit of the Taxpayer, was 1% on sales and 13% on purchases. Therefore, penalty was properly assessed. However, should the adjustments set forth above increase the compliance ratio to an acceptable level, penalty will be abated.

If you should have any further questions, please feel free to contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

TPD/5172K

Rulings of the Tax Commissioner