Tax Type
Retail Sales and Use Tax
Description
Transportation equipment; Vehicles, Vessels; Ship repair
Topic
Taxability of Persons and Transactions
Date Issued
04-23-1996
April 23, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter of December 14, 1995 in which you seek correction of the sales and use tax audit assessment of **** (the "Taxpayer") for the period of October 1992 through September 1995.
FACTS
The Taxpayer is in the ship repair business. As a result of the sales and use tax audit, the Taxpayer was held liable for the tax on tangible personal property used in the cleaning of the drydock. Certain provisions of the Taxpayer's contracts call for the removal of debris and other waste products subsequent to the sandblasting and recoating of ship hulls. The Taxpayer contends that the items used in the cleanup process are an integral part of their repair operation and are therefore exempt.
The Taxpayer is also taking exception to the taxing of rope used for safety lines and in the ship staging area and tools used in the erection of the staging area.
DETERMINATION
Code of Virginia § 58.1-609.3(4) provides that the Virginia retail sales and use tax does not apply to "ships and vessels, or repairs and alterations thereof, used or to be used exclusively or principally in interstate or foreign commerce;... 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 and
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". The term "used directly" refers to items that are "indispensable" to the actual production or repair activity and which are used as an "immediate" part of such process. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).
While the department recognizes the fact that many of the Taxpayer's contracts require the cleaning of the drydock of debris resulting from the Taxpayer's hull blasting and hull coating operation, items used in the clean-up process are not used directly in the ship repair operation. While the clean-up operation may be essential to fulfill the terms set forth in the contract, it does not enjoy the exemption set forth under Code of Virginia § 58.1-609.3(4).
In regard to the ropes used in the staging area, it is understood by this office that the ropes are used for safety lines on the staging and also as barriers in areas where lead base paint is being removed from ship hulls. While safety items may be an integral part of the repair process, and may in fact be required by state or federal regulation, the ropes are not used directly in the repair process and are taxable.
Lastly, the Taxpayer feels the tools, e.g. deep well socket and ratchet wrenches, used in the erection of the staging are directly used in ship repair and exempt from the tax. It is understood by this office that the staging equipment serves as a work area for performing repairs much in the same manner as scaffolding. While the department recognizes that the staging itself is used directly in ship repair and therefore exempt, the tools used in constructing the staging are indirectly used in ship repair and are taxable. See P.D. 94-221 enclosed.
Based on the above, there is no basis for revising the audit. If you should have any further questions, please contact **** Office of Tax Policy, at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10707K
Rulings of the Tax Commissioner