Document Number
Tax Type
Retail Sales and Use Tax
Penalties and Interest; Compliance ratio
Collection of Delinquent Tax
Date Issued

February 18, 1997

Re: § 58.1-1821 Application: Retail Sales & Use Tax


This is in reply to your letter in which you request a correction of the department's sales and use tax assessment issued to *************** (the "Taxpayer"), for the period November 1991 through October 1994. I apologize for the delay in our response.


The Taxpayer operates plants in the tri-state area of ***************. The plants make various wood products, including wood chips. The Taxpayer sells the wood chips to various industrial users and resellers. The Taxpayer disagrees with the results of the audit regarding three areas: Barges and other marine equipment, fuel used in tug boats, and penalty.



The department’s audit held taxable the purchase of barges used in transporting wood chips from the Taxpayer's non-Virginia locations to the Taxpayer's manufacturing facility in central Virginia. The Taxpayer contends that the barges are used more than 50% in interstate commerce, and, therefore, qualify for the exemption provided under Code of Virginia § 58.1-609.3(4), which states in part that:
    • 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 and possessions, or in a foreign commerce between ports in the Commonwealth and ports in foreign countries, when delivered directly to such ships or vessels ....

An interpretation of the foregoing is found in Virginia Regulation (VR) 630-10-98, which defines "interstate commerce" as "a business venture between the people of two states."

Based on the foregoing, and on the basis that the Taxpayer's principal use of the barges is in interstate commerce. l find sufficient cause to remove the barges from the department's audit.

Fuel for Tug Boat

The Taxpayer states that fuels used in tug boats should also be considered exempt on the basis that the department's revision of VR 630-10-98, effective July 1994, expanded the definition of "high seas" which had not been previously applied, and is, therefore, not retroactively applicable. The Taxpayer contends that its interpretation of "high seas" and "intercoastal trade between ports in this state and ports in other states" is consistent with the intent of the General Assembly in that "intercoastal trade" also included trade within the coast line of the United States, i.e., along the intercoastal waterway and **********. The Taxpayer seeks exclusion of tax on the purchase of fuels used in its tug boat operations.

The Taxpayer's tug boats tow or push the barges from the non-Virginia locations to the Taxpayer's central Virginia manufacturing plant. While I am in agreement that the tugs operate in interstate commerce, l do not agree that these vessels are "plying the high seas." The wording of Code of Virginia § 58.1-609.3(4) has remained virtually the same since its initial construction. The only change was in 1993 when the terminology "or repairs and alterations thereof' was moved to another location within the same sentence structure. The portion of the exemption relating to fuels, however, was not affected in its application to specific vessels "plying the high seas."

I have enclosed a copy of P.D. 93-55 (03/05/93), which was available to the public prior to the revision of VR 630-10-98 in 1994. The 1994 revised regulation merely incorporated established interpretations of the exemption. As the tugs in question are not "plying the high seas," the fuels used to power the tugs are subject to the tax. Additionally, regarding the Taxpayer's contention that fuels were exempted by the previous auditors, l am unable to allow for an adjustment on the basis that the Taxpayer's claim could not be verified with the information available to the current auditor.


The Taxpayer states that if the compliance calculation included taxes paid directly to the vendor, its compliance ratio would be well above the 85% requirement. Alternately, if the contested items were not considered in the compliance factor, the Taxpayer would again achieve the required threshold. The Taxpayer further contends that irrespective of the outcome of the department's response, the contested items should not be considered in the compliance calculations as they are new issues. The department's regulations specifically allow for an exclusion of such issues in computing the compliance ratio.

Regarding your discussion of including taxes paid to the vendor in the compliance calculations, the tax paid to vendors at the time of purchase is "sales" tax, not "use" tax. The purpose of the "use" tax compliance ratio is to determine how well the taxpayer has complied with the Virginia tax laws in accruing and remitting use tax on untaxed purchases. The inclusion of the sales tax paid to vendors in computing the use tax compliance ratio would inaccurately portray the taxpayer's compliance with the Virginia use tax laws.

On the basis that the contested areas of the audit are new issues, however, l will allow for waiver of the penalty. I have enclosed a copy of VR 630-10-80, which sets forth the compliance requirements and thresholds. Please note that, for the future, the Taxpayer will be expected to exhibit a compliance ratio of 85% or better in its subsequent audits in order to avoid any application of penalty.

Based on all of the information before me, l will allow for an adjustment to the department's audit as indicated. As a result of the adjustments, the revised deficiency totals . Please return your payment for this amount to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this matter, please contact***** of the department's Office of Tax Policy at*************.


Danny M. Payne
Tax Commissioner


Last Updated 08/25/2014 16:46