Tax Type
Retail Sales and Use Tax
Description
Ships, vessels; Supplies used in tugboat operation
Topic
Taxability of Persons and Transactions
Date Issued
07-14-1994
July 14, 1994
Re: Protective Claim and §58.1-1821 Application: Retail Sales & Use Tax
Dear*************
This will reply to your letter of November 12, 1993 in which you submit a protective claim for refund of taxes paid in connection with, and seek correction of, a sales and use tax assessment to your client, *********(the "Taxpayer") for the period August 1988 through June 1991.
FACTS
The Taxpayer is engaged in a tugboat operation, and the businesses of repairing and selling boats and vessels, and leasing barges. It was audited and found liable for the tax on purchases of various supplies for use in its tugboat operation and tools and supplies used in repairing ships and vessels generally for resale. While the audit has been revised based upon additional information provided by the Taxpayer, it is my understanding that the Taxpayer continues to assert that certain other supplies should be removed from the audit assessment.
DETERMINATION
Va. Code §58.1-609.3(4) provides an exemption from the retail sales and use tax for:
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- Ships or vessels, or repairs and alterations thereof, used or to be used exclusively or principally in interstate or foreign commerce; fuel and supplies for use or consumption aboard ships or vessels plying the high seas, either in intercoastal trade between ports in the Commonwealth and ports in other states of the United States or its territories or possessions, or in foreign commerce between ports in the Commonwealth and ports in foreign countries when delivered directly to such ships or vessels; or tangible personal property used directly in the building, conversion or repair of the ships or vessels covered by this subdivision.
- Ships or vessels, or repairs and alterations thereof, used or to be used exclusively or principally in interstate or foreign commerce; fuel and supplies for use or consumption aboard ships or vessels plying the high seas, either in intercoastal trade between ports in the Commonwealth and ports in other states of the United States or its territories or possessions, or in foreign commerce between ports in the Commonwealth and ports in foreign countries when delivered directly to such ships or vessels; or tangible personal property used directly in the building, conversion or repair of the ships or vessels covered by this subdivision.
You should note, however, that the statute does in fact limit the exemption available for fuel and supply purchases to those "for use or consumption aboard ships or vessels plying the high seas." The department is bound by the doctrine of strict construction in interpreting the sales and use tax exemptions. Under the principles established by the courts, taxation is the rule and exemption is the exception. Accordingly, since the groceries, charts, first aid kits, etc., were used on tugboats which did not ply the high seas they were appropriately held taxable in the audit.
Furthermore, you contest the proration of the tax on certain other items. However, it is my understanding that the exemption was disallowed in part on the basis that a specific destination could not be identified at the time the vessels were being repaired for resale and thus proration of the tax was appropriate in this instance .
Finally, you contest the tax on certain items which you maintain were a direct and integral part of the building, conversion and repair of vessels engaged in interstate commerce. The auditor, on the other hand, held such items taxable as being "one step removed" from the repair process.
The first part of the above cited exemption serves to exempt the purchase of repairs and alterations by the owners and operators of the ships or vessels whereas the last part of the exemption exempts tangible personal property by the owners and operators or by others engaged in the shipbuilding or repair businesses. To qualify for the exemption, tangible personal property purchased must be used directly in the building, conversion or repair of a ship or vessel used exclusively or principally in interstate or foreign commerce or plying the high seas. The term "used directly" refers to items that are "indispensable" to the actual production or repair activity and which are used as an "immediate" part of such process. See Virginia Regulation (VR) 630-10-63(B)(2) and Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973)
From the information provided, it does not appear that any of the items which you asserted were used in the building and repair of ships are repair or replacement parts, or are used directly in the building, conversion or repair of vessels used exclusively and principally in interstate commerce. The wax clamps, tip cleaners, polish and polish remover, demurrage charges, grinding wheels, grinding disks, and grinder are not used directly in ship repair but instead are used to maintain equipment, specifically the welding machine, which is used directly in the repair of the ships and vessels. Accordingly, such items were appropriately held taxable in the assessment.
While the assessment appears to be correct as recently revised, if the Taxpayer can provide specific documentation illustrating that the supplies/items at issue do in fact qualify for the exemption, the assessment will be revised accordingly and a refund will be issued to the Taxpayer. Such documentation should be provided to the department's ****** District Office within 30 days of this letter. If sufficient documentation is not received within the allotted time or if it does not adequately justify an adjustment in this case, then there would be no basis to issue a refund.
For your information, I am enclosing a copy of the recently revised and adopted VR 630-10-98 which clarifies the department's policy with respect to the exemptions for ships and vessels.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7513H
Rulings of the Tax Commissioner