Tax Type
Retail Sales and Use Tax
Description
Mining; Dust control equipment
Topic
Taxability of Persons and Transactions
Date Issued
09-12-1995
September 12, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************:
It was a pleasure meeting with you and********on July 10, 1995. As a result of that meeting the department agreed to revisit the following three issues; i) water trucks to control dust in your surface mining operation, ii) radio communication equipment used in above ground surface mining, and iii) the recovery of coal from tailing piles. I have been informed by *****of our******** District Office that all other areas discussed during our meeting have been resolved with you and final revisions rest with our determination on the above three issues.
Prior to addressing the issues set forth above, I would like to take this opportunity to set forth the statutory exemption afforded to mining and mineral processing operations. Code of Virginia § 58.1-609.3.2(iii) provides a sales and use tax exemption for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale". (Emphasis added). In the case of Webster Brick Company. Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978), copy enclosed, the Virginia Supreme Court ruled that "essential items which are not an immediate part of actual production are not exempt". Therefore, while an item may be considered essential, this alone does not mean that it is "used directly" in an exempt activity. Keeping this in mind, I will address the contested issues separately below.
********** (the "Taxpayer") takes the position that the water trucks used to control dust in their surface mining operation are analogous to the rock dusting equipment found to be exempt in their deep mining operations. Due to the very nature of the industry, items found to be both essential and used immediately in one operation (deep mining), may not meet the direct use test in the other operation (surface mining). It is in this vein that the department has made a distinction between dusting equipment employed in deep mining operations and water trucks used in surface mining operation. Dusting equipment used in deep mining is deemed to be used directly as mining literally cannot occur in a deep shaft without adequate rock dust control. By way of contrast, surface mining can occur with or without dust control; in a surface mining situation, dust control merely facilitates efficient production (by improving visibility, etc.). For this reason, the department has no choice but to deem the water trucks taxable.
The Taxpayer is also seeking an exemption for two-way radio systems used in their surface mining operation. Virginia Regulation (VR) 630-10-65.2 (copy enclosed), provides a specific exemption for "trolley telephones and mine telephones used within the mine for purposes such as dispatching on mine railways within the mine or work coordination". As understood by this office, because of the large expanse of land involved in a surface mining operation, a two-way radio system is necessary to coordinate work from different areas of the job site. For this reason, I will agree to remove the two-way radios from the audit.
In regard to the recovery of coal from the tailing piles, Virginia Regulation (VR) 630-10-65.2.1 defines mining and specifically provides that "mining does not include the extraction from tailing piles which because of technological advances in processing have become economic mineral deposits". (Emphasis added). The rationale for this policy is that neither mining nor mineral processing occurs in this process. The process does not entail the severance or extraction of minerals from the earth (as extraction from the mine has already occurred); also, there is no further processing that occurs. Based on the clear language of this regulation and as there appears to have been no significant changes in process since the adoption of the regulation in 1985, the department cannot find any basis for classifying extraction from a tailing piles as being an exempt process.
Finally, the Taxpayer is requesting waiver of audit penalty for both the audit period prior to January 1, 1991 and the period subsequent to January, 1991. Due to the fact many of the issues involved in the audit prior to January, 1991 were first time issues, I will agree to waive all audit penalty associated with these audits. For those audits covering periods subsequent to January, 1991, upon completion of all revisions, the use tax compliance ratio will be recomputed and the penalty will apply in accordance with VR 630-10-80 (copy enclosed).
Based on the above, and the additional information provided to our****** District Office, the audit assessments for both the previous audit period and the current audit period will be adjusted and revised notices of assessment will be issued. To avoid the accrual of additional interest, payment should be made within 30 days after receiving the revised assessments. If you should have any further questions, please contact*********, Office of Tax Policy, at ***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8651K
Rulings of the Tax Commissioner