93-115 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Petroleum refinery; Blending equipment; Preponderance of use

Topic

Exemptions

Property Subject to Tax

Date Issued

04-29-1993

April 29, 1993

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

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

This will reply to your letter of August 12, 1992, in which you seek correction of a sales tax assessment for **************(the "Taxpayer").

FACTS

The Taxpayer operates a petroleum refinery. An audit by the department revealed that a particular piece of machinery (the "rack") was purchased without the payment of tax. The Taxpayer maintains that the rack, which includes a computerized blending system, is manufacturing equipment. The rack controls the blending of various petroleum components at the final stage before loading into a truck. Based on this, the Taxpayer believes the equipment should be exempt.

DETERMINATION

Va. Code §58.1-608(A)(3)(b)(iii) provides an exemption from the retail sales and use tax for "machinery ... used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale." Under Virginia Regulation (VR) 630-10-63(B)(2), the term "used directly" refers to:

- those activities that are an integral part of the production of a product, including all steps of an integrated manufacturing process, but not including incidental activities such as general maintenance, management, and administration.

According to the information provided, the rack is used in three different activities. The rack is used to receive incoming raw material. Under VR 630-10-63(C)(2), tangible personal property, used on the plant site, to unload or to convey raw materials to storage is exempt. When used to blend specified ratios of various refined petroleum components to produce new petroleum based products prior to loading a customer's truck, the rack is being used in the last step of production, completing the product for sale. This constitutes industrial processing, an exempt activity. The rack is also used as a loading station; on occasion, no blending occurs prior to loading trucks. This activity falls within the scope of distribution, which is not part of manufacturing or processing. Under VR 630-1063(C)(3), all tangible personal property used to remove or load finished goods from storage at the plant site is taxable.

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 item will be totally exempt only if the preponderance of its use is in exempt production activities. See VR 630-10-63(D). Conversely, if a preponderance of the item's use is in nonexempt activities, the item will be fully taxable. The burden is on the taxpayer to prove that the property qualifies for the exemption.

The auditor noted that the Taxpayer was to discuss percentages such as blending use to total use of the rack. Without such information, the auditor was unable to determine if a preponderance of the rack's use was in exempt or activities. Because exemptions from the tax are construed strictly against the taxpayer, and the Taxpayer could not document that the equipment qualified for the exemption, the auditor properly held the purchase of the rack to be taxable.

If you can provide documentation showing that, during the period in question, the preponderance of the rack's use was in exempt activities, then the audit will be adjusted accordingly. The information should be sent to the department's Audit Review Unit, P.O. Box 1880, Richmond, Virginia 23282-1880, within 30 days. If the requested information is not timely submitted, the information on which the assessment was originally based will be presumed to be the best available. The assessment will then be immediately due and payable, and collection action will resume.

Sincerely,

W. H.. Forst
Tax Commissioner

OTP/647OF

Rulings of the Tax Commissioner