Tax Type
Retail Sales and Use Tax
Description
Farming retail outlet; Grain drying; Peanut shelling equipment; Spreader buggies loaned to farmers
Topic
Exemptions
Property Subject to Tax
Date Issued
03-17-1994
March 17, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letters of June 28, 1991 in which you seek correction of sales and use tax assessments for*********** ("Taxpayer #1") and ************** ("Taxpayer #2").
FACTS
Taxpayer #1 operates a retail outlet which caters to the farming community. In addition, Taxpayer #1 engages in other activities, such as operating a grain buying station and providing machinery and equipment used by farmers to spread fertilizer.
In its grain operations, Taxpayer #1 buys grain from farmers; the grain is loaded into bins for initial storage and drying. The bins are equipped with heating apparatus fueled by propane gas. Subsequent to drying, the grain is stored in elevators and then sold. Taxpayer #1 may, on occasion, grind grain for farmers.
Taxpayer #1 protests the assessment of sales tax on: (1) the purchase of propane fuel used to dry the grain; (2) the purchase of aflatoxin test kits and tubes used to test the grain for moisture content; (3) parts for spreader buggies used by farmers to apply fertilizer and other agricultural products; and (4) the purchase of materials for repairs of the grain bins and grain elevators.
Taxpayer #2 also provides a variety of sales and services to farmers. Taxpayer #2 operates a peanut buying station and also provides peanut shelling services to farmers. The shelling is done for farmers who bring in a crop of seedling peanuts. The peanuts are shelled, coated with a chemical substance to prevent rot and then returned to the farmer, who uses the seedlings to plant new crops.
Taxpayer #2 protests the assessment of sales tax on: (1) equipment used in shelling peanuts; (2) parts and fuel for the equipment; and (3) parts for spreader buggies used by farmers to apply fertilizer and other agricultural products.
Because of the differences in the items assessed, each Taxpayer's protest will be addressed separately.
DETERMINATION
Taxpayer #1
Propane fuel: The propane fuel was used in heating apparatus to dry grain stored in a bin. You maintain that the fuel qualifies for the manufacturing and processing exemption.
Virginia Regulation (VR) 630-10-63 provides that for a business to obtain the manufacturing or processing exemption, it must be manufacturing or processing products for sale or resale and such manufacturing or processing must be industrial in nature.
In Commonwealth v. Orange Madison Coop., 220 Va. 655, 261 S.E.2d 532 (1980), the Virginia Supreme Court defined "processing" as:
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- to subject to a particular method, system, or technique of preparation, handling or other treatment designed to effect a particular result: put through a special process: as ... (1): to prepare for market, manufacture, or other commercial use by subjecting to some process... (2): to make usable by special treatment.
In contrast to Orange-Madison, where different elements were blended to form new products, the grain in this case does not undergo any special process. The propane assessed by our auditor was used merely for the drying of the grain prior to the storage of the grain in bins. The drying of the grain is necessary not to render the product more marketable or useful, but rather to help inhibit rot
Even assuming that drying does constitute "processing," the activity is not industrial in nature. Under the definition of "manufacturing, processing, refining, or conversion" in Va. Code §58.1-602, it is stated that "industrial in nature" shall include, but is not limited to, those businesses classified in codes 10 through 14 and 20 through 39 published in the Standard Industrial Classification (SIC) Manual for 1972. The business of performing services on crops, such as drying corn and grain is included in code 07 (Agricultural Services) of the SIC Manual for 1972. Therefore, under Va. Code §58.1-602, the process of drying grain is deemed not to be industrial in nature as required under VR 630-10-63, and the fuel purchased for use in this process is not exempt from the sales and use tax.
You also argue that the drying of grain qualifies for the exemption for feed making under Va. Code §58.1-609.2(5) (formerly Va. Code §58.1-608(A)(2)(e)). However, the facts presented indicate that the fuel in question was not used directly in making feed for sale or resale, but rather was used for drying grains prior to storage in bins for future use. Therefore, the exemption is not available to fuel used in this manner. However, fuel used in feed making equipment which was found to be exempt from tax should be similarly exempted.
Aflatoxin test kits and tubes: For the reasons stated above, the aflatoxin test kits and tubes used to test the grain for moisture content are not used in industrial processing and are not directly used in making feed. Therefore, these items are subject to the sales and use tax.
Parts for spreader buggies: You state that spreader buggies owned by Taxpayer #1 are used solely by farmers to apply fertilizer and other agricultural products. It is your position that parts and repairs to these spreader buggies qualify for the agricultural exemption under Va. Code §58.1-609.2(1) (formerly Va. Code §58.1-608(A)(2)(a)).
The agricultural exemption for equipment of this type is available when sold to farmers for producing crops for market. In this case, Taxpayer #1 does not operate as a farmer producing crops for market; instead, Taxpayer #1 owns the spreader buggies and allows farmers to use them to spread fertilizer. It is my understanding that Taxpayer #1 loans the buggies to farmers free of charge. Because the equipment was not sold or leased to a farmer for the purpose of producing crops for market, the agricultural exemption is not available, and the equipment was properly found to be taxable by the auditor.
Materials for repairs of grain bins and grain elevators: You assert that certain purchases of materials were for repairs to real property (grain bins and elevators) and should be exempt from tax.
Based upon findings by the department subsequent to its audit, these materials will be removed from Taxpayer #1's audit and the assessment will be adjusted accordingly.
Taxpayer #2
Equipment used in shelling peanuts: Taxpayer #2 contends that the equipment used in shelling peanuts is used directly in industrial processing and is exempt from tax.
In contrast with the drying of grain stored in bins, the peanuts in this case do undergo a special process which renders them more marketable or useful. As such, the requirements of Orange-Madison are met and processing occurs.
Furthermore, the other criteria established in VR 630-10-63 are satisfied. Possession of the property is transferred from Taxpayer #2 to the farmer for consideration, satisfying the definition of "sale" under Va. Code §58.1-602, and the processing is industrial in nature. Therefore, the equipment used in this activity may be purchased exempt of the tax. Similarly, the parts and fuel for the equipment may be purchased tax exempt.
Parts for spreader buggies: For the reasons set forth above relating to the same issue for Taxpayer #1, parts for spreader buggies do not qualify for the agricultural exemption and are subject to tax.
Accordingly, the audit report will be revised to remove Taxpayer #1's purchases of materials for repairs of grain bins and grain elevators, and fuel used in exempt feed making equipment will be removed from the audit. In addition, the audit report will be revised to remove Taxpayer #2's purchase of peanut shelling equipment and repair parts for such equipment. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/5293F
Rulings of the Tax Commissioner