Tax Type
Retail Sales and Use Tax
Description
Motor fuels; Off-road motor fuel taxable
Topic
Taxability of Persons and Transactions
Date Issued
05-27-1998
May 27, 1998
Dear**************:
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to your client ***** (the Taxpayer) for the period July 1994 through June 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of fabricating bituminous concrete for use in real property construction contracts and also for sale to contractors. An audit of the Taxpayer resulted in an assessment primarily for untaxed purchases of equipment used in its production process. The Taxpayer believes it qualifies as a manufacturer and all equipment, parts, and related items purchased for producing bituminous concrete qualify for the industrial manufacturing and processing exemption found in Code of Virginia Sec. 58.1-609.3(2). The Taxpayer also protests the assessment of tax on (i) fuel used in equipment, (ii) a sweeper truck, and (iii) duplicate and other items it believes are not taxable. Lastly, the Taxpayer protests the assessment of penalty and interest.
DETERMINATION
I will address each of the issues raised by the Taxpayer separately.
Manufacturing exemption
The Taxpayer feels that it is entitled to the industrial manufacturing and processing exemption for machinery, parts, and related items purchased for producing bituminous concrete. The Taxpayer contends that the fact that 90% of its product is for its own use in real property construction does not disqualify it from the manufacturing exemption.
Code of Virginia Sec. 58.1-609.3(2) provides, in part, an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies used directly in processing, manufacturing . . . products for sale or resale. . . .' (Emphasis added).
The industrial manufacturing exemption set forth in Code of Virginia Sec. 58.1609.3(2) is limited to items used in the manufacture of goods for sale or resale. Title 23 on the Virginia Administrative Code (VAC) 10-210-410, consistent with Code of Virginia Sec. 58.1-610, specifies that a sale to a contractor of tangible personal property that will be incorporated into real property is deemed a sale to the ultimate consumer, and not a sale for resale by the contractor. Title 23 VAC 10-210-410 provides that a contractor is treated as the ultimate user and consumer of all tangible personal property purchased or leased in connection with such real property contracts and must pay the tax on all materials at the time of purchase. Subsection F states that the production exemption is not available to a contractor whose principal or primary business is the fabrication of tangible personal property for his own use or consumption. Enclosed are copies of Public Documents (P.D.) 94-264 (8/23/94) and 90-188 (10/29/90) which discuss the department's established policy regarding issues similar to those presented in your letter.
In this case, the Taxpayer is operating in a dual capacity, fabricating tangible personal property for sale or resale and for its own use or consumption in the performance of real property construction contracts. A review of the Taxpayer's records reveals that the Taxpayer is primarily fabricating tangible personal property for its own use and consumption in the performance of real property construction contracts. Based on the statute and regulation, the Taxpayer is not entitled to the industrial manufacturing and processing exemption set forth in Code of Virginia Sec. 58.1-609.3(2).
Credit for tax paid to another state
The Taxpayer maintains that sales tax was paid to other states on certain items in the audit and therefore, the Taxpayer is entitled to a credit against the audit liability for such taxes paid.
Code of Virginia Sec. 58.1-611 provides that "[A] credit shall be granted against taxes imposed. . . with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state.'
The Taxpayer purchased tangible personal property from vendors located in other states. A review of the audit report indicates that only those items that the Taxpayer purchased in another state for which the sales tax was not collected were included in the audit assessment. For situations in which the Taxpayer took possession of an item in another state and that state's sales tax was paid, the purchase was not included in the audit assessment. Thus, the Virginia credit for taxes paid to other states as provided in Code of Virginia Sec. 58.1-611 does not apply in this case.
Motor Vehicle fuel
The audit revealed that the Taxpayer provided its supplier with an exemption certificate for the purchase of fuel used in the Taxpayer's heavy equipment to pave highways. The Taxpayer contends that the fuel is used in off-road construction vehicles and is exempt from the sales and use tax under Code of Virginia Sec. 58.1-2118.7 and Title 23 VAC 10-210-1010.
Code of Virginia Sec. 58.1-2118 exempts from the motor fuel sales and use tax motor fuel used for purposes other than to propel vehicles operated or intended to be operated on highways from the motor fuel and special fuel taxes. Fuels which are not subject to the motor vehicle sales and use tax are subject to the retail sales and use (provided no other statutory exemption is applicable). Title 23 VAC 10-210-1010, copy enclosed.
The Taxpayer purchased fuel used to power its off-road construction equipment exempt from the motor fuel and special fuel taxes. Because the fuel is not subject to the motor fuel sales and use tax and is not exempt under any other statutory exemption, the retail sales and use tax applies in accordance with the regulation. Accordingly, the auditor was correct in the assessment of fuel in this case.
Purchase of Vehicles
The Taxpayer maintains that vehicles included in the audit assessment have already been subject to the tax, including a sweeper truck.
Based on a review of documentation provided to the auditor, sales tax was not paid on the purchase of the sweeper truck. Furthermore, the Taxpayer has not identified nor provided any documentation regarding other vehicles for which it believes tax has been paid. Accordingly, l find no basis for adjustment to the audit regarding this issue.
If the Taxpayer can provide documentation that the tax has been properly paid on the items in question, they will be removed from the audit assessment.
Other contested purchases
The Taxpayer maintains that ***** held taxable in the audit represents tax and interest paid on a purchase price of ***** and therefore should be removed from the audit liability. In addition, the Taxpayer maintains that the tax was paid on line item 204 listed on the exceptions list.
The auditor picked up a fixed asset listed on the deprecation schedule for *****. The Taxpayer provided an invoice for ***** and applicable sales tax. The amount held in the audit is the difference between the fixed asset price of ***** taken from the deprecation schedule and the invoice of *****. If the Taxpayer can provide documentation to support its claim that the represents tax paid on the purchase, the item will be removed from the audit assessment.
With regard to line item 204, the auditor held taxable the entire purchase since the sales tax was not separately stated on the quotation. If the Taxpayer can provide sufficient documentation that the sales tax was separately stated on the invoice and paid to the vendor, this item will be removed from the audit.
Duplicate items
The Taxpayer maintains that the auditor recorded line item 192-203 on the exceptions list and then included the combined total of these items as line item 110. Thus, the Taxpayer contends that line item 110 for ***** should be removed from the audit. In addition, the Taxpayer maintains that the auditor assessed tax on duplicate items.
Based on the information provided by the Taxpayer, line item 192-200 for ***** was incorrectly included in line item 110. The audit will be adjusted to remove these items. However, no adjustment will be made to the audit for line item 201-203 since they are not listed in the exceptions.
The audit will also be adjusted to remove from the exceptions list line item 180 for the purchase of furnace upgrades and line item 184 for metal connex containers.
Penalty and interest
In order for penalty to be waived on third and subsequent audits, the use tax compliance ratio must be a minimum of 85%. See 23 VAC 10-210-2032 (copy enclosed).
The Taxpayer's use tax compliance ratio on this third generation audit was 0%. Therefore, the department is unable to waive the penalty at this time. Subsequent to any audit revisions, the use tax compliance ratio will be recomputed. Once a new compliance ratio has been established, the penalty will be reevaluated in accordance with the above tolerances.
Title 23 VAC 10-210-2032 (copy enclosed) explains the application of interest to audit deficiencies. The regulation clearly states that interest on an assessment accrues from the date of the assessment until payment is made. The application of interest to all audit deficiencies is mandatory. The interest in this case was correctly calculated under the law. To the extent that tax is abated based on adjustments to the audit, the corresponding interest will also be abated.
Summary
The assessment will be adjusted according to the determination set forth herein. I will allow the Taxpayer an opportunity to provide the department with additional documentation as outlined above. This information should be sent to *****, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880 within 60 days of the date of this letter. Upon review and possible revision as a result thereof, a revised Notice of Assessment will be mailed to the Taxpayer. If the documentation is not received within the specified time period, the assessment will be considered correct as issued.
If you have any questions regarding this letter, please contact ***** at *****.
Dear**************:
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to your client ***** (the Taxpayer) for the period July 1994 through June 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is in the business of fabricating bituminous concrete for use in real property construction contracts and also for sale to contractors. An audit of the Taxpayer resulted in an assessment primarily for untaxed purchases of equipment used in its production process. The Taxpayer believes it qualifies as a manufacturer and all equipment, parts, and related items purchased for producing bituminous concrete qualify for the industrial manufacturing and processing exemption found in Code of Virginia Sec. 58.1-609.3(2). The Taxpayer also protests the assessment of tax on (i) fuel used in equipment, (ii) a sweeper truck, and (iii) duplicate and other items it believes are not taxable. Lastly, the Taxpayer protests the assessment of penalty and interest.
DETERMINATION
I will address each of the issues raised by the Taxpayer separately.
Manufacturing exemption
The Taxpayer feels that it is entitled to the industrial manufacturing and processing exemption for machinery, parts, and related items purchased for producing bituminous concrete. The Taxpayer contends that the fact that 90% of its product is for its own use in real property construction does not disqualify it from the manufacturing exemption.
Code of Virginia Sec. 58.1-609.3(2) provides, in part, an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy, or supplies used directly in processing, manufacturing . . . products for sale or resale. . . .' (Emphasis added).
The industrial manufacturing exemption set forth in Code of Virginia Sec. 58.1609.3(2) is limited to items used in the manufacture of goods for sale or resale. Title 23 on the Virginia Administrative Code (VAC) 10-210-410, consistent with Code of Virginia Sec. 58.1-610, specifies that a sale to a contractor of tangible personal property that will be incorporated into real property is deemed a sale to the ultimate consumer, and not a sale for resale by the contractor. Title 23 VAC 10-210-410 provides that a contractor is treated as the ultimate user and consumer of all tangible personal property purchased or leased in connection with such real property contracts and must pay the tax on all materials at the time of purchase. Subsection F states that the production exemption is not available to a contractor whose principal or primary business is the fabrication of tangible personal property for his own use or consumption. Enclosed are copies of Public Documents (P.D.) 94-264 (8/23/94) and 90-188 (10/29/90) which discuss the department's established policy regarding issues similar to those presented in your letter.
In this case, the Taxpayer is operating in a dual capacity, fabricating tangible personal property for sale or resale and for its own use or consumption in the performance of real property construction contracts. A review of the Taxpayer's records reveals that the Taxpayer is primarily fabricating tangible personal property for its own use and consumption in the performance of real property construction contracts. Based on the statute and regulation, the Taxpayer is not entitled to the industrial manufacturing and processing exemption set forth in Code of Virginia Sec. 58.1-609.3(2).
Credit for tax paid to another state
The Taxpayer maintains that sales tax was paid to other states on certain items in the audit and therefore, the Taxpayer is entitled to a credit against the audit liability for such taxes paid.
Code of Virginia Sec. 58.1-611 provides that "[A] credit shall be granted against taxes imposed. . . with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state.'
The Taxpayer purchased tangible personal property from vendors located in other states. A review of the audit report indicates that only those items that the Taxpayer purchased in another state for which the sales tax was not collected were included in the audit assessment. For situations in which the Taxpayer took possession of an item in another state and that state's sales tax was paid, the purchase was not included in the audit assessment. Thus, the Virginia credit for taxes paid to other states as provided in Code of Virginia Sec. 58.1-611 does not apply in this case.
Motor Vehicle fuel
The audit revealed that the Taxpayer provided its supplier with an exemption certificate for the purchase of fuel used in the Taxpayer's heavy equipment to pave highways. The Taxpayer contends that the fuel is used in off-road construction vehicles and is exempt from the sales and use tax under Code of Virginia Sec. 58.1-2118.7 and Title 23 VAC 10-210-1010.
Code of Virginia Sec. 58.1-2118 exempts from the motor fuel sales and use tax motor fuel used for purposes other than to propel vehicles operated or intended to be operated on highways from the motor fuel and special fuel taxes. Fuels which are not subject to the motor vehicle sales and use tax are subject to the retail sales and use (provided no other statutory exemption is applicable). Title 23 VAC 10-210-1010, copy enclosed.
The Taxpayer purchased fuel used to power its off-road construction equipment exempt from the motor fuel and special fuel taxes. Because the fuel is not subject to the motor fuel sales and use tax and is not exempt under any other statutory exemption, the retail sales and use tax applies in accordance with the regulation. Accordingly, the auditor was correct in the assessment of fuel in this case.
Purchase of Vehicles
The Taxpayer maintains that vehicles included in the audit assessment have already been subject to the tax, including a sweeper truck.
Based on a review of documentation provided to the auditor, sales tax was not paid on the purchase of the sweeper truck. Furthermore, the Taxpayer has not identified nor provided any documentation regarding other vehicles for which it believes tax has been paid. Accordingly, l find no basis for adjustment to the audit regarding this issue.
If the Taxpayer can provide documentation that the tax has been properly paid on the items in question, they will be removed from the audit assessment.
Other contested purchases
The Taxpayer maintains that ***** held taxable in the audit represents tax and interest paid on a purchase price of ***** and therefore should be removed from the audit liability. In addition, the Taxpayer maintains that the tax was paid on line item 204 listed on the exceptions list.
The auditor picked up a fixed asset listed on the deprecation schedule for *****. The Taxpayer provided an invoice for ***** and applicable sales tax. The amount held in the audit is the difference between the fixed asset price of ***** taken from the deprecation schedule and the invoice of *****. If the Taxpayer can provide documentation to support its claim that the represents tax paid on the purchase, the item will be removed from the audit assessment.
With regard to line item 204, the auditor held taxable the entire purchase since the sales tax was not separately stated on the quotation. If the Taxpayer can provide sufficient documentation that the sales tax was separately stated on the invoice and paid to the vendor, this item will be removed from the audit.
Duplicate items
The Taxpayer maintains that the auditor recorded line item 192-203 on the exceptions list and then included the combined total of these items as line item 110. Thus, the Taxpayer contends that line item 110 for ***** should be removed from the audit. In addition, the Taxpayer maintains that the auditor assessed tax on duplicate items.
Based on the information provided by the Taxpayer, line item 192-200 for ***** was incorrectly included in line item 110. The audit will be adjusted to remove these items. However, no adjustment will be made to the audit for line item 201-203 since they are not listed in the exceptions.
The audit will also be adjusted to remove from the exceptions list line item 180 for the purchase of furnace upgrades and line item 184 for metal connex containers.
Penalty and interest
In order for penalty to be waived on third and subsequent audits, the use tax compliance ratio must be a minimum of 85%. See 23 VAC 10-210-2032 (copy enclosed).
The Taxpayer's use tax compliance ratio on this third generation audit was 0%. Therefore, the department is unable to waive the penalty at this time. Subsequent to any audit revisions, the use tax compliance ratio will be recomputed. Once a new compliance ratio has been established, the penalty will be reevaluated in accordance with the above tolerances.
Title 23 VAC 10-210-2032 (copy enclosed) explains the application of interest to audit deficiencies. The regulation clearly states that interest on an assessment accrues from the date of the assessment until payment is made. The application of interest to all audit deficiencies is mandatory. The interest in this case was correctly calculated under the law. To the extent that tax is abated based on adjustments to the audit, the corresponding interest will also be abated.
Summary
The assessment will be adjusted according to the determination set forth herein. I will allow the Taxpayer an opportunity to provide the department with additional documentation as outlined above. This information should be sent to *****, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880 within 60 days of the date of this letter. Upon review and possible revision as a result thereof, a revised Notice of Assessment will be mailed to the Taxpayer. If the documentation is not received within the specified time period, the assessment will be considered correct as issued.
If you have any questions regarding this letter, please contact ***** at *****.
Rulings of the Tax Commissioner