Tax Type
Retail Sales and Use Tax
Description
Ships and vessels; Pollution containment equipment; Vessel supplies
Topic
Taxability of Persons and Transactions
Date Issued
01-27-1997
January 27, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear********
In your letter, you seek correction of the sales and use tax assessment issued to*********** (the Taxpayer) as a result of an audit. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is engaged in the transportation of products along waterways and the movement of ships and vessels into harbors for repair, loading and unloading. An audit for the period January 1993 through October 1995 resulted in tax assessed on untaxed purchases of supplies used and consumed aboard the Taxpayer's ships and vessels.
The Taxpayer takes exception to the tax assessed on oil spill containment and clean up equipment. According to the Taxpayer, this equipment is mandated by the U. S. Coast Guard and other regulatory agencies for placement aboard tugs and tank barges and used exclusively for cleaning up and containing fuel spills which may occur during operations.
The Taxpayer also takes exception to the tax assessed on wires and related towing equipment and maintains that these items are components or repair parts of the systems which provide a tug boat with the capability to perform its principal mission of towing. These items must be replaced periodically to maintain the towing capability in a satisfactory condition.
In addition, the Taxpayer takes exception to the tax assessed on nylon lines used as mooring lines. The Taxpayer maintains that these lines are integral outfitting items used on all of its vessels. Although not permanently installed, they are indispensable to a vessel regardless of whether the vessel is at sea or moored to a pier.
DETERMINATION
Code of Virginia § 58.1-609.3(4) provides, in part, an exemption from the sales and use tax for:
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- Ships or vessels, or repairs and alterations thereof, used or to be used exclusively or principally in interstate or foreign commerce; fuel and supplies for use or consumption aboard ships or vessels plying the high seas, either in intercoastal trade between ports in the Commonwealth and ports in other states of the United States or its territories or possessions, or in foreign commerce between ports in the Commonwealth and ports in foreign countries, when delivered directly to such ships or vessels....
In interpreting the above exemption, the department must adhere to the doctrine of strict construction of exemption statutes set forth by the Virginia Supreme Court in Commonwealth v. Community Motor Bus, 214 Va.155,198 S.E.2d 619 (1973) and several other cases. Under a strict reading of the statute, an exemption is available for component parts of a ship or vessel, i.e., those items which are permanently affixed (a fixture) to the structure of a ship or vessel. As such, it has been the department's longstanding policy that this exemption is not available for equipment which is not permanently affixed to the vessel's structure.
In addition, supplies are not integral parts or fixtures of a ship or vessel as these items are generally consumed after initial use or have a short-term useful life. As such, supplies are subject to taxation unless used or consumed aboard ships or vessels plying the high seas in intercoastal or foreign trade as set out in the above exemption.
The Taxpayer's ships and vessels do not ply the high seas as defined in 23 VAC 10--210-4050. That section of the Administrative Code defines "high seas" as "that portion of the ocean which is beyond the territorial jurisdiction of the United States. It does not include the Chesapeake Bay, intercoastal waterways, or inland rivers or waterways." Based on the information provided, the Taxpayer is not entitled to an exemption on its purchases of supplies used or consumed aboard its vessels. Further, the tax applies to Taxpayer's purchases of equipment which are not a fixture or integral part of its vessels. As the contested items are not fixtures of the vessels, the above cited exemption does not apply to such purchases.
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 (DEQ) may be purchased exempt of the tax. For the oil spill containment and clean up equipment, there is nothing to indicate that these items were certified as pollution control equipment by DEQ. Also, the fact that this equipment is required by federal, state or local law or regulation is not, by itself, dispositive that an exemption applies. The auditor properly held these items to be taxable.
Based on the foregoing, l find no basis to revise the audit. An updated bill for the total amount of********* will be mailed to the Taxpayer shortly. Payment should be sent to either the address shown on the bill or to the attention of ******* at the Department of Taxation, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within the next 45 days.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10953R
Rulings of the Tax Commissioner