Tax Type
Retail Sales and Use Tax
Description
Pollution control and cleanup equipment
Topic
Taxability of Persons and Transactions
Date Issued
09-17-1996
September 17, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear******
This is in response to your letter of January 22, 1996 in which you seek correction of sales and use tax assessments issued to ****** (the "Taxpayer").
FACTS
Within Virginia, the Taxpayer operates an oil refinery, petroleum product terminals, and service stations. The Taxpayer's Virginia refinery was audited for the period April 1991 through September 1995 and was assessed in October 1995. An audit of the terminals and service stations, for the period June 1990 through May 1993, resulted in an assessment dated December 13, 1993. This assessment was paid shortly thereafter.
The Taxpayer contests a number of assessed transactions in the refinery audit. The Taxpayer also requests that purchases for the terminals and retail outlets, on which the tax was erroneously paid to vendors or erroneously self-assessed, be credited against the unpaid refinery assessment.
DETERMINATION
Refinery Issues
Raw material storage tanks: The Taxpayer's activities at the refinery constitute exempt "refining" as defined in Code of Virginia § 58.1-602. This definition specifically includes "the handling and storage of raw materials at the plant site...." As such, the charges associated with the repair of raw material storage tanks which are at issue in this case will be removed from the assessment. This exemption, however, does not extend to foundations or pads for these tanks. Any repairs to the foundations or pads remain taxable.
Tax accrued on exempt purchases: The Taxpayer maintains that it accrued and paid the tax on exempt purchases and asks that these items be made part of the audit sample.
During a sample audit, erroneously remitted taxes will generally be allowed as a credit against the sample deficiency. I understand, however, that the records made available to the auditors thus far are not sufficient to show that the tax on the exempt purchases was indeed remitted to the department. I will instruct the auditors to review any additional documentation the Taxpayer can furnish. Provided the Taxpayer can show that taxes were erroneously accrued and paid on exempt purchases, such purchases will be included as a credit in the audit sample.
Tax paid to vendors on exemPt purchases: The Taxpayer has identified invoices for exempt purchases on which the tax was erroneously paid to vendors and requests that these items be made part of the audit sample.
As noted above, the department will generally allow an audit credit for taxes which were incorrectly remitted to the department. Conversely, the department will generally not credit taxes which were incorrectly paid to vendors. Doing so might jeopardize the proper allocation of the local portion of the tax and would also disregard any dealer discount claimed by the vendor. Further, because taxpayers can get refunds from vendors for erroneously paid taxes, allowing a credit on audits for such taxes would be contrary to sound accounting principles.
Purchases that distort the audit sample: The Taxpayer has identified two vendors from whom purchases are made only twice a year during scheduled "turnarounds" - which you describe as extensive and periodic maintenance of the facility. The Taxpayer does not dispute the taxability of these purchases, but maintains that the extrapolation of the sample overstates the liability and suggests an alternative computation that would reduce the liability associated with these purchases.
You correctly indicate that in some cases the department will remove transactions which distort an audit sample. I do not agree, however, that the contested transactions in this case create any such distortion. By using a three-month sample, the auditors could identify purchases made only during that period. Purchases made outside of the sample period, including those associated with the scheduled turnarounds, are obviously not included in the sample. Further, the turnaround itself is a recurring activity, and the purchases from these vendors are recurring and are made in the normal course of business. Accordingly, I do not find grounds to recalculate the liability associated with this issue.
Taxes paid to another state: You indicate that the tax on one assessed purchase was correctly paid to the state of Texas and therefore should not have been assessed on the Virginia audit. In this regard, you rely on Virginia Regulation 630-10-29 which provides a credit against the tax imposed by Virginia for the amount of tax paid in the state of purchase.
The documents provided to the department thus far show that the trucking company invoiced the seller who in turn added the shipping charge (as a separately stated item) on the invoice to the Taxpayer for the sale of the property. These transactions indicate that the trucking company was hired by the seller and suggests that the Taxpayer did not take possession of the property in Texas. Accordingly, it appears that the sale by the Texas supplier was a sale in interstate commerce which would not be taxable to that state. This being the case, the tax was erroneously paid to Texas and is properly assessed on the Virginia audit.
Nevertheless, the department will certainly review any additional documents which the Taxpayer can provide. If it is clearly shown that the tax on this purchase was properly remitted to Texas, the purchase will be removed from the assessment.
Purchases for electric power customer: The Taxpayer entered into a contract with a customer who generates electric power. Under the terms of the contract, the Taxpayer is responsible for the maintenance and repair of the customer's fuel storage facilities, including fuel storage tanks and pipes associated with those tanks.
The department has learned that the customer's facilities have been certified by the Department of Environmental Quality as pollution control facilities used primarily for the purpose of abating or preventing pollution. Pursuant to Code of Virginia § 58.1--609.3(9), such certified pollution control facilities are exempt from the tax. Accordingly, the Taxpayer's purchases in regard to this issue will be removed from the assessment.
Summary (refinery issues): The Taxpayer's purchases of tangible personal property associated with its raw materials storage tanks will be removed from the assessment as will those purchases used on its customer's exempt pollution control facilities. Further, the department's auditors will review additional documentation concerning tax accrued on exempt purchases and taxes paid to the state of Texas. Further revisions stemming from this review will be made as warranted.
In regard to assessed penalty charges, I note that the compliance ratio for this fifth generation audit is zero. However, I understand that the audit revisions will significantly affect the assessed penalty charges. Therefore, I propose to wait until the audit assessment has been finalized before making a determination on the penalty issue.
Terminal and Service Station Issues
The Taxpayer identifies a variety of purchases made for its Virginia terminals and service stations. In effect, the Taxpayer maintains that it has overpaid Virginia tax by accruing the tax or paying the tax to vendors on what it feels are exempt purchases.
Furthermore, the Taxpayer contends that the statute of limitations for all of its Virginia business operations is still open. This contention appears to be based on the fact that the Taxpayer operates with one Virginia sales and use tax registration number under which all purchases for their Virginia business operations are reported. Notwithstanding this one registration number, the department separately audited the terminals/service stations for the period June 1990 through May 1993 and the refinery operations for the period April 1991 through September 1995.
In regard to the terminals/service stations, an assessment was issued December 13, 1993 and paid shortly thereafter. The three-year statute of limitations on this assessment expires in December 1996. This statute, however, applies to taxes erroneously assessed by the department. The Taxpayer does not protest transactions which were assessed by the department during this audit. Rather, the Taxpayer is seeking correction of taxes which it (1) paid on equipment which the Taxpayer now contends is qualified for the pollution control exemption, (2) voluntarily paid directly to the department, and (3) erroneously paid to vendors.
Pollution Control Purchases: Code of Virginia § 58.1-1823 provides that:
-
- Any person filing a tax return required for any tax administered by the Department of Taxation may file an amended return with the Department (i) within three years from the last day prescribed by law for the timely filing of the return ... or (iii) within one year from the filing of an amended return resulting in the payment of additional tax....
At the time these purchases were made, the tax was properly paid or accrued. In this instance, there is no provision in § 58.1-1823 to allow the refund of a tax that has been properly and voluntarily paid. Nor, in these transactions, has there been any erroneous assessment by the department. Accordingly, there are no grounds to allow for a refund or credit for the taxes paid on these purchases beyond those which are still currently under statute.
For those purchases which are still under statute, the Taxpayer may file amended returns and claim a refund for taxes which were erroneously paid to the department. The Taxpayer will need to provide the proper documentation from the appropriate certifying agency that the purchases qualify as pollution control equipment.
Taxes Voluntarily Paid to the Department: The terminals/services stations audit was assessed through an extrapolation of fixed assets and other purchases. The fixed assets were examined for the entire audit period and included taxable items on which the tax was not paid (in the amount of *******) and exempt items on which the tax was accrued in error (in the amount of ***** ). Recurring purchases were examined for the sample period of December 1992. The audit exceptions for this sample period also include taxable items on which the tax was not paid (in the amount of ***** and, as credits against these taxable items, exempt items on which the tax was erroneously self-assessed and paid to the department (in the amount of *****). Accordingly, the extrapolated audit assessment is based on net sample purchases: untaxed taxable purchases less exempt purchases on which the tax was erroneously self-assessed.
There is every indication that the audit sample is representative of the entire audit period. It follows that the audit assessment includes the tax due on untaxed purchases and the credit for exempt purchases which were erroneously self-assessed. In effect, these credits reduced the Taxpayer's audit liability. It appears that the Taxpayer is now requesting that the department give additional credit for specific exempt purchases made during the audit period. I cannot agree that this is appropriate because the credit for these items has already been included in the assessment. As an analogy, the department will not tax specific taxable purchases outside of the sample period because these purchases are deemed to be taxed as part of the sample extrapolation. Similarly, those transactions on which the Taxpayer erroneously accrued the tax have been credited as part of the sample extrapolation.
Taxes Erroneously Paid to Vendors: As addressed above, the department will not include such erroneously paid taxes as part of the audit sample. To the extent that such purchases are still in statute, the Taxpayer may seek refunds of such erroneously paid taxes directly from their vendors. Because these taxes were not assessed by the department, I can find no grounds to justify extending the statute beyond the statutory three-year period.
Credit Against the Outstanding Assessment
The Taxpayer requests that the department use any potential overpayments from its terminals and service station operations as a credit against the current outstanding assessment resulting from the refinery audit.
In the instant case the department has suspended collection of the outstanding refinery assessment pursuant to the Taxpayer's § 58.1-1821 appeal. Collection activity will continue to be suspended pending revisions to that assessment (e.g., removal of purchases associated with raw material storage tanks). To further delay collection of this assessment while the Taxpayer files its amended returns would create an unreasonable and potentially significant delay in the collection of an outstanding assessment.
I must therefore deny the Taxpayer's request which would allow potential overpayments from the terminals and service station operations to be used as credits against the outstanding refinery assessment. Nevertheless, and as noted above, overpayments made to the department will be refunded to the Taxpayer upon filing of its amended returns.
I will initiate the further review of the Taxpayer's records immediately so that the refinery audit may be finalized. In the meantime, please contact ***** in my Office of Tax Policy at ***** if you have additional questions.
Sincerely
Danny M. Payne
Tax Commissioner
OTP/10558I
Rulings of the Tax Commissioner