Tax Type
Retail Sales and Use Tax
Description
Common carrier vs. contract carrier
Topic
Exemptions
Property Subject to Tax
Date Issued
12-06-1995
December 6, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************:
This will reply to your letter in which you seek correction of sales and use tax assessed to your client, ***************(the "Taxpayer"), for the period April 1988 through August 1992. I apologize for the unnecessary delay in responding to your appeal.
The Taxpayer is engaged in bulk hauling of coal, grain, and miscellaneous materials. In conformance with federal regulations, the Taxpayer is designated as a common carrier under a certificate of convenience and necessity issued by the Interstate Commerce Commission (ICC). As a result of the department's audit, the auditor concluded that the Taxpayer was operating instead as a contract carrier based on the requirements set by both the ICC and the State Corporation Commission (SCC). The Taxpayer takes exception to the department's position and argues that its ICC designation is controlling and sufficient for entitlement to the exemption provided for common carriers under Code of Virginia § 58.1-609.3(3).
Code of Virginia § 58.609.3(3) provides an exemption from the sales and use tax for "...tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railways, for use or consumption by such common carrier directly in the rendition of its public service." Virginia Regulation (VR) 630-10-24.3 further interprets the statute and stipulates that a common carrier must be authorized to operate under a certificate of convenience and necessity issued by the State Corporation Commission or the Interstate Commerce Commission in order to qualify for the exemption. The regulation only applies to common carriers of property by motor vehicle.
The Taxpayer asserts that while it is based in Virginia, the majority of its motor carrier revenue is attributable to transport activities that occur outside Virginia. Generally, its Virginia mileage is attributable to return trips to the home office for general repairs and change of drivers. The Taxpayer believes that because it operates mainly in interstate commerce, its ICC designation as a common carrier meets the requirements set forth in the statute and regulation and therefore its purchases of tangible personal property for vehicles used in the transport of property qualify for exemption.
The Taxpayer has proven that the majority of its transport services are provided outside the boundaries of Virginia based on the data provided. However, the central issue here is whether the Taxpayer, for purposes of the application of the exemption, is acting in the capacity of a common carrier or contract carrier of property. While the department has verified that the Taxpayer was certificated to operate under common carrier authority by the ICC during the audit period, the auditor assessed the tax based on his discovery that a significant amount of transport services were provided to a related party to the Taxpayer who purchases and sells coal and engages the services of the Taxpayer to transport the coal on a continuing and regular basis. Therefore, such an arrangement constitutes contract carrier activity and the auditor denied the exemption on that basis.
Notwithstanding, the department does not rule out that, to some extent, the Taxpayer may be engaged in common carrier activity. However, only tangible personal property purchased for use in the Taxpayer's common carrier operation (as defined by the bounds of its ICC or SCC authority) is exempt from the tax. Any tangible personal property purchased and used in trucking operations outside the bounds of its ICC or SCC authority is taxable. The Taxpayer is requested to submit information indicating its common and contract carrier contracts, including data relating to points of origination and destination and the rates charged. If convincing evidence is provided, the Taxpayer will be deemed to operate in a dual capacity of common/contract carrier and the exemption will apply to property used in the common carrier activity.
Under 49 U.S.C.A. § 10526(a)(6) and Code of Virginia §56-274(7), the transport of certain agricultural commodities is considered exempt from the regulatory authority of the ICC or SCC. It is my understanding that the Taxpayer is engaged in the transport of processed hominy feed, processed poultry grain, and oats which all constitute agricultural commodities. If it is determined that the Taxpayer is engaged in common carrier activity, its ICC and SCC certification will not extend to the transport of processed poultry grain and oats as these are deemed exempt.
Because the poultry grain and oats are exempt, the transport of such does not constitute a part of common carrier activity and therefore, the sales tax exemption would not apply to property used in those instances. The converse is true in relation to the transport of processed hominy feed.
In instances where items may be used in both a taxable and exempt manner, the tax is prorated. Subsection C of the regulation provides for the proration of the tax as follows:
In accordance with the aforementioned, the auditor will contact the Taxpayer within 30 days from the date of this letter to review any additional information. Adjustments to the audit report, if warranted, will be finalized at that time. Shortly thereafter, the Taxpayer will receive an updated "Notice of Assessment", which should be paid within 30 days to avoid the accrual of additional interest charges. If payment is not received within that time period, the assessment will be subject to collection activity.
If you should have questions regarding the policy set forth in this letter, please contact ******** in the Office of Tax Policy at (804) 367-0964. Questions concerning the audit and any further adjustments should be directed to ********* Audit Supervisor, or the auditor***** in the ********* District Office at**********.
The Taxpayer is advised that effective January 1,1995, due to deregulation of the motor carrier industry on the federal and state levels, the ICC and SCC have ceased issuing certificates of convenience and necessity. It is the department's understanding that the ICC still recognizes a distinction between common and contract carriers by issuing common carrier or contract carrier authority based on the insurance requirements.
This action has considerably impacted the distinction between common and contract carriers and the application of Virginia's exemption; however, the department is bound by the existing statute which clearly limits the exemption to common carriers rather than contract carriers. The department is gathering information regarding the impact of deregulation on the future application of common carrier exemption and we welcome your input and suggestions concerning this issue.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7579J
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************:
This will reply to your letter in which you seek correction of sales and use tax assessed to your client, ***************(the "Taxpayer"), for the period April 1988 through August 1992. I apologize for the unnecessary delay in responding to your appeal.
FACTS
The Taxpayer is engaged in bulk hauling of coal, grain, and miscellaneous materials. In conformance with federal regulations, the Taxpayer is designated as a common carrier under a certificate of convenience and necessity issued by the Interstate Commerce Commission (ICC). As a result of the department's audit, the auditor concluded that the Taxpayer was operating instead as a contract carrier based on the requirements set by both the ICC and the State Corporation Commission (SCC). The Taxpayer takes exception to the department's position and argues that its ICC designation is controlling and sufficient for entitlement to the exemption provided for common carriers under Code of Virginia § 58.1-609.3(3).
DETERMINATION
Code of Virginia § 58.609.3(3) provides an exemption from the sales and use tax for "...tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railways, for use or consumption by such common carrier directly in the rendition of its public service." Virginia Regulation (VR) 630-10-24.3 further interprets the statute and stipulates that a common carrier must be authorized to operate under a certificate of convenience and necessity issued by the State Corporation Commission or the Interstate Commerce Commission in order to qualify for the exemption. The regulation only applies to common carriers of property by motor vehicle.
The Taxpayer asserts that while it is based in Virginia, the majority of its motor carrier revenue is attributable to transport activities that occur outside Virginia. Generally, its Virginia mileage is attributable to return trips to the home office for general repairs and change of drivers. The Taxpayer believes that because it operates mainly in interstate commerce, its ICC designation as a common carrier meets the requirements set forth in the statute and regulation and therefore its purchases of tangible personal property for vehicles used in the transport of property qualify for exemption.
The Taxpayer has proven that the majority of its transport services are provided outside the boundaries of Virginia based on the data provided. However, the central issue here is whether the Taxpayer, for purposes of the application of the exemption, is acting in the capacity of a common carrier or contract carrier of property. While the department has verified that the Taxpayer was certificated to operate under common carrier authority by the ICC during the audit period, the auditor assessed the tax based on his discovery that a significant amount of transport services were provided to a related party to the Taxpayer who purchases and sells coal and engages the services of the Taxpayer to transport the coal on a continuing and regular basis. Therefore, such an arrangement constitutes contract carrier activity and the auditor denied the exemption on that basis.
Notwithstanding, the department does not rule out that, to some extent, the Taxpayer may be engaged in common carrier activity. However, only tangible personal property purchased for use in the Taxpayer's common carrier operation (as defined by the bounds of its ICC or SCC authority) is exempt from the tax. Any tangible personal property purchased and used in trucking operations outside the bounds of its ICC or SCC authority is taxable. The Taxpayer is requested to submit information indicating its common and contract carrier contracts, including data relating to points of origination and destination and the rates charged. If convincing evidence is provided, the Taxpayer will be deemed to operate in a dual capacity of common/contract carrier and the exemption will apply to property used in the common carrier activity.
Under 49 U.S.C.A. § 10526(a)(6) and Code of Virginia §56-274(7), the transport of certain agricultural commodities is considered exempt from the regulatory authority of the ICC or SCC. It is my understanding that the Taxpayer is engaged in the transport of processed hominy feed, processed poultry grain, and oats which all constitute agricultural commodities. If it is determined that the Taxpayer is engaged in common carrier activity, its ICC and SCC certification will not extend to the transport of processed poultry grain and oats as these are deemed exempt.
Because the poultry grain and oats are exempt, the transport of such does not constitute a part of common carrier activity and therefore, the sales tax exemption would not apply to property used in those instances. The converse is true in relation to the transport of processed hominy feed.
In instances where items may be used in both a taxable and exempt manner, the tax is prorated. Subsection C of the regulation provides for the proration of the tax as follows:
-
- "It is possible for an item of tangible personal property to be used in both a taxable and exempt manner ... In such instances the tax due on the item is prorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner."
- "It is possible for an item of tangible personal property to be used in both a taxable and exempt manner ... In such instances the tax due on the item is prorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner."
In accordance with the aforementioned, the auditor will contact the Taxpayer within 30 days from the date of this letter to review any additional information. Adjustments to the audit report, if warranted, will be finalized at that time. Shortly thereafter, the Taxpayer will receive an updated "Notice of Assessment", which should be paid within 30 days to avoid the accrual of additional interest charges. If payment is not received within that time period, the assessment will be subject to collection activity.
If you should have questions regarding the policy set forth in this letter, please contact ******** in the Office of Tax Policy at (804) 367-0964. Questions concerning the audit and any further adjustments should be directed to ********* Audit Supervisor, or the auditor***** in the ********* District Office at**********.
The Taxpayer is advised that effective January 1,1995, due to deregulation of the motor carrier industry on the federal and state levels, the ICC and SCC have ceased issuing certificates of convenience and necessity. It is the department's understanding that the ICC still recognizes a distinction between common and contract carriers by issuing common carrier or contract carrier authority based on the insurance requirements.
This action has considerably impacted the distinction between common and contract carriers and the application of Virginia's exemption; however, the department is bound by the existing statute which clearly limits the exemption to common carriers rather than contract carriers. The department is gathering information regarding the impact of deregulation on the future application of common carrier exemption and we welcome your input and suggestions concerning this issue.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7579J
Rulings of the Tax Commissioner