Tax Type
Retail Sales and Use Tax
Description
Government transactions; Designation as government's agent not proved
Topic
Taxability of Persons and Transactions
Date Issued
06-20-1996
June 20, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment for ******* (the "Taxpayer") for the period April 1992 through February 1995.
FACTS
The Taxpayer is a ship repair business which takes equipment to the job site to perform repairs. The Taxpayer also performs repairs in its shop. An audit of the Taxpayer resulted in the assessment of tax on various purchases. The Taxpayer protests the assessment relating to four items, maintaining they are used directly in ship repair and exempt of the tax pursuant to Code of Virginia § 58.1-609.3(4).
DETERMINATION
Code of Virginia § 58.1-609.3(4) provides that the retail sales and use tax does not apply to "ships and vessels used or to be used exclusively or principally in interstate or foreign commerce, or repairs and alterations thereof...or tangible personal property used directly in the building, conversion or repair of the ships or vessels covered by this subdivision." (Emphasis added).
The term "used directly" when used in relation to manufacturing, processing, refining, or conversion is defined under Code of Virginia § 58.1-602 and includes "those activities which are an integral part of the production of a product...but not including ancillary activities such as general maintenance or administration." While the department is aware that many of the activities carried out by the Taxpayer are necessary to the repair process, the department strictly interprets the phrase "used directly." Given this background, I will address the contested purchases included in the audit.
Firecloth
The firecloth is used as a protective covering while welding. As stated above, "used directly" includes those activities which are an integral part of the repair process, but does not include ancillary activities such as general maintenance. The firecloth is used solely in a preventive maintenance function and is therefore subject to the tax.
Heating oil
You contend that the heating oil deemed taxable by the auditor was used in a boiler that provided steam that ran equipment used in the ship repair process. According to the audit report, the heating oil was used for purposes not directly involved in the repair process. Specifically, the auditor found that the heating oil was used to provide heat and hot water to accommodate the crew involved in repairing vessels and not used in running equipment used in the ship repair process.
While it is necessary to maintain acceptable living and working conditions to accommodate crew members and workers during the repair process, the heating oil consumed in providing such conditions does not directly affect the repair process. For this reason, heating oil used for this purpose is subject to the tax.
If the Taxpayer can provide documentation showing the heating oil was used to directly to run equipment used in the ship repair process, the auditor will review it and adjust the assessment as appropriate.
Conex storage boxes
The auditor assessed tax on the purchase of conex storage boxes used in storing equipment and supplies. You claim the boxes were purchased for a military branch of the federal government with the Taxpayer "essentially acting as a purchasing agent for the government." Because the federal government is not subject to tax on its purchases, you maintain the purchase of the conex storage boxes by the Taxpayer is exempt from taxation.
The credit of the federal government must be bound in order for the Taxpayer to be considered a purchasing agent. No evidence has been provided to the auditor or with this appeal to indicate the Taxpayer was designated as an official purchasing agent for the federal government or that the federal government's credit was bound to the vendor when the purchases were made. The fact that title to the boxes passed to the government, and the Taxpayer may have been reimbursed for the cost of its purchases, does not mean the Taxpayer was a purchasing agent of the government entitled to make purchases exempt of the tax. Based on the information provided, the auditor properly assessed tax on the conex storage boxes.
Oil boom and absorbing supplies
The auditor assessed tax on oil boom and oil absorbing supplies. The booms circle the ship while repairs are being made and contains any oil which may spill. Absorbent pads and chemicals soak up any oil which may spill on the ship. You assert that the oil boom should be exempt because it is a necessary part of the ship repair process, particularly when an oil tanker is being repaired and oil must be contained.
Based on the definition of "used directly" cited above, it is clear that the oil boom and absorbing supplies are not used directly in the repair of ships. Instead, these items are used in a preventive maintenance function and are subject to the tax.
I would note that Code of Virginia § 58.1-609.3(9) provides an exemption from the sales and use tax for certified pollution control equipment. Equipment used primarily for abating or preventing pollution and certified by the Department of Environmental Quality may be purchased exempt of the tax. For the audit at issue, there is nothing to indicate the oil boom or absorbing supplies were certified as pollution control equipment by the Department of Environmental Quality. The auditor properly held these items to be taxable.
Based on the foregoing, I find there is no basis to revise the audit. I understand the assessment has been paid in full. Accordingly, no refund will be issued at this time. If the Taxpayer can provide documentation that the heating oil was used to run equipment used directly in the repair process, the auditor will review the information and determine if a refund is warranted. Please send the requested documentation to the department's**** District Office. If you have not supplied the auditor with the necessary information within 30 days, the assessment will be deemed correct as issued.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10268F
Rulings of the Tax Commissioner