Tax Type
Retail Sales and Use Tax
Description
Agricultural cooperative associations; Motor vehicles; Off-road vehicles
Topic
Exemptions
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
10-17-1996
October 17, 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 sales and use tax assessed to (the "Taxpayer") for the period February 1991 through January 1994. I apologize for the delay in responding to your letter.
FACTS
The taxpayer is an agricultural cooperative association whose membership is composed of farmers engaged in agricultural production for market. The Taxpayer sells agricultural products and services to its membership.
The Taxpayer was audited for each of its six locations and assessed tax on sales, fixed assets, and recurring purchases. The sales issues have been resolved; however, the Taxpayer takes exception to the tax assessed on fixed asset and recurring purchases used in providing services to member farmers. The Taxpayer contests the tax relating to five issues: unlicensed farm vehicles upon which exempt mixing and spraying apparatus is mounted for use in applying liquid fertilizer products; unlicensed farm vehicles, including attached equipment and machinery used to apply dry fertilizer products; related repair parts for the unlicensed vehicles used in both liquid and dry fertilizer application; unlicensed trailers used to haul additional dry fertilizer product; and penalty waiver.
The Taxpayer believes that the sales tax exemption for agricultural production provided under Cope of Virginia § 58.1-609.2(1) applies to its purchases. In addition, the Taxpayer contends that the manufacturing exemption (Code of Virginia § 58.1--609.3(2)) allowed for the mixing and spraying apparatus and their related repair parts used in applying liquid fertilizer should extend to the taxable chassis and equipment of the liquid fertilizer vehicles and the taxable dry fertilizer vehicles. Lastly, the Taxpayer believes trailers used to haul additional fertilizer product should qualify for exemption under Code of Virginia § 58.1-609.1(2).
DETERMINATION
Agricultural Production Exemption
Code of Virginia § 58.1-609.2(1) provides an exemption from the sales and use tax for "[c]ommercial feeds; seeds; plants; fertilizers; liming materials; breeding and other livestock; semen; breeding fees; baby chicks; turkey poults; rabbits; quail; llamas; bees; agricultural chemicals; fuel for drying or curing crops; baler twine; containers for fruit and vegetables; farm machinery; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor; and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production, which also includes beekeeping and fish, quail, rabbit and worm farming for market."
The 1982 General Assembly enacted legislation in House Bill 923 that broadened an exemption from corporation, franchise and income taxes to agricultural cooperative associations. Code of Virginia § 13.1-341. The department issued Tax Bulletin 82-18 dated June 30, 1982, copy enclosed, which discussed the application of the legislation in detail. The Tax Bulletin stated that "[a]n agricultural cooperative association continues to be taxable on any business that it engages in other than those specifically exempted by statute." Shortly thereafter, the department issued another Tax Bulletin dated July 9, 1982, copy enclosed, which clarified that House Bill 923 did not extend sales and use tax exemption to agricultural cooperative associations. The department's policy has not changed since the issuance of the Tax Bulletins.
The department has consistently applied the agricultural production exemption to purchases by individual farmers. The Taxpayer is not a farmer engaged in agricultural production for market, as contemplated by the exemption. As such, the Taxpayer does not qualify for the exemption.
Manufacturing Exemption
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for "....machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale...."
The department has previously extended the manufacturing exemption to the mixing and spraying equipment on agricultural fertilizer vehicles and the related repair parts. The exemption does not apply to the remaining chassis, parts, and attachments of the vehicle. This is analogous to the department's policy regarding concrete mixer trucks in which the manufacturing exemption applies to the rotating mixer and the accessory parts necessary for connection to the motor. See enclosed P.D. 85-50 (3/14/85) and P.D. 94-59 (3/14/94). It is my understanding that the auditor has applied the manufacturing exemption to the mixing components and related repair parts of the liquid fertilizer vehicles. Similarly, I will agree to extend the exemption to the mixing components and the related repair parts of the dry fertilizer vehicles. There is, however, no basis to extend the exemption to the chassis or other equipment on the fertilizer vehicles.
Motor Vehicle Exemption
Code of Virginia § 58.1-609.1 (2) provides an exemption from the sales and use tax for "[m]otor vehicles, trailers, semitrailers, mobile homes and travel trailers." Motor vehicles are not subject to the retail sales and use tax provided they are subject to the motor vehicle sales and use tax administered by the Department of Motor Vehicles. Vehicles which are not subject to the motor vehicle sales and use tax are subject to the retail sales and use tax. Virginia Regulation (VR) 630-10-67, copy enclosed.
The trailers referred to by the Taxpayer constitute devices used with the Taxpayer's fertilizer spreading vehicles to haul additional fertilizer product. According to the Taxpayer, the trailers are deemed off-road devices and are not subject to the motor vehicle sales and use tax. Because the Taxpayer's trailers are not subject to the motor vehicle sales and use tax, the retail sales and use tax applies in accordance with the regulation.
Penalty Waiver
VR 630-10-80(2)(A), copy enclosed, provides for the mandatory application of penalty to second and subsequent audits based on the level of compliance exhibited by the taxpayer. I note that the current audit involves locations which were not previously audited.
Code of Virginia § 58.1-105 grants the Tax Commissioner the authority to accept an offer in compromise and to settle claims of disputed or doubtful liability, or of doubtful collectibility. Based on the facts and circumstances outlined in your letter, I find sufficient cause to allow for waiver of penalty in this instance.
Please note that, for the next audit, the Taxpayer will be expected to exhibit a use tax compliance ratio of 85% or better for the ****** , ******* , and ****** locations. For the ***, ******, and******** locations, the Taxpayer must exhibit a use tax compliance ratio of 60% or better. Sales compliance must meet or exceed 85% for all locations to avoid the application of penalty.
The audits will be returned to the auditors to make the necessary adjustments within 30 days from the date of this letter. Shortly thereafter, you will receive adjusted bills that will include interest through the date of the letter of protest. If you have questions regarding the policy set forth in this letter, you may contact ******* at ******. If you have questions regarding the audit revisions, please contact ********* at ******* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8649J
Rulings of the Tax Commissioner