Tax Type
Retail Sales and Use Tax
Description
Transportation equipment; Vehicles, vessels; Tug boat supplies.
Topic
Taxability of Persons and Transactions
Date Issued
12-30-1997
December 30, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
In your letter of November 20, 1997, you seek correction of the retail sales and use tax assessment issued to***** (the Taxpayer) as a result of an audit. Payment of ****been received and applied to the audit bills.
FACTS
The Taxpayer is a marine towing company which primarily tows container barges between ports within the Hampton Roads harbor and other ports in the Chesapeake Bay, as well as other ports located along the east coast of the United States. The Taxpayer has been assessed use tax on an untaxed fixed asset and on various untaxed supplies used aboard its tug boats and in its trucks, shop, yard, and administrative offices.
The Taxpayer takes exception to the tax assessed on the tug boat supplies, such as tow ropes, charts, provisions, chlorine tablets, flashlights and batteries, ear muffs, portable heaters, combination locks, mops, buckets, brooms, brushes, and other supplies. The Taxpayer maintains that these tug boat supplies are exempt from the tax under Code of Virginia § 58.1-609.3(4).
Copies of all cited references are enclosed.
DETERMINATION
Code of Virginia § 58.1-609.3(4) provides an exemption from the retail sales and use tax for:
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- ...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 and vessels....
The above exemption sets out certain criteria which must be met in order for the exemption to apply. Thus, in order for supplies used aboard the Taxpayer's tug boat to qualify for the above exemption, the Taxpayer's tug boats must be:
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- 1. Plying the high seas, and
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- 2. Engaged in intercoastal trade between Virginia ports and ports of other states, or engaged in foreign commerce between Virginia ports and ports of other countries.
Both of the above criteria must be met for the exemption to be available for supplies used aboard the Taxpayer's tug boats.
Supplies used aboard tug boats
In P.D. 93-55 (3/5/93), the department held that "the exemption is available only to those ships and vessels which regularly sail over that portion of the ocean beyond the territorial jurisdiction of the United States (i.e., the high seas)." (Emphasis and insert added.) The definition of "high seas" in Title 23 of the Virginia Administrative Code (VAC) 10-210-4050 specifically excludes "the Chesapeake Bay, intercoastal waterways, or inland rivers or waterways." In the Taxpayer's case, it has not been demonstrated that any of the Taxpayer's vessels regularly travel over the high seas. Rather, it is my understanding that the Taxpayer's vessels are used primarily in plying intercoastal or inland waters, not the high seas.
The above cited statute also contains an exemption from the tax for "[s]hips and vessels, or repairs and alterations thereof, used or to be used exclusively or principally in interstate or foreign commerce." (Emphasis added.) As interpreted in another case [see P.D. 97-36 (1/27/97)], this 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." Accordingly, an exemption is not available for equipment which is not permanently affixed to the vessel's structure. This same ruling further held that:
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- ...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. (Emphasis added.)
Consequently, towing and mooring lines were deemed to be supplies, rather than fixtures or integral parts of ships and vessels. Accordingly, the "repairs and alterations" exemption cited above was not applicable. As this taxpayer's tugs were not engaged in plying the high seas in intercoastal or foreign trade, an exemption was not available for the lines used aboard that taxpayer's tug boats.
Conclusion
The department is bound by the doctrine of strict construction in interpreting the sales and use tax exemptions. Although the Taxpayer may satisfy the "intercoastal trade" criteria of the exemption, it does not satisfy the "plying the high seas" criteria of the exemption. Since the Taxpayer does not meet both criteria necessary for exemption as explained above, all of the tug boat supplies assessed in this case are subject to taxation.
While you feel that the assessment is unfair, the department has been consistent in its interpretation for ships and vessels and the tax treatment of supplies purchased for use on ships and vessels. Although you requested a meeting, this determination has been issued without one because the application of the law and regulations is clear in this case. However, if you desire to meet with me, please do not hesitate to let me know.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13262R
Rulings of the Tax Commissioner