Tax Type
Retail Sales and Use Tax
Description
Cotton equipment loaned to farmers; Prefabricated buildings
Topic
Collection of Delinquent Tax
Date Issued
10-09-1998
October 9, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letters in which you seek the correction of assessments issued to ***** (Taxpayer 1), and ***** (Taxpayer 2), for the periods March 1991 through February 1997 and March 1996 through February 1997, respectively.
FACTS
Both Taxpayer 1 and Taxpayer 2 (collectively, the "Taxpayers') own and operate cotton ginning facilities in Virginia. The Taxpayers were audited by the department and assessed use tax on certain expense purchases and fixed asset purchases. The Taxpayers maintain that the assessment is erroneous because certain equipment and machinery purchases held in the audit qualify for the manufacturing exemption.
Taxpayer 2 also seeks the correction of an assessment made on the purchase of prefabricated buildings. Taxpayer 2 maintains that it contracted with the seller to install the buildings and the buildings became real property after installation. Therefore, the seller is a real property contractor that is responsible for payment of the tax on the buildings.
DETERMINATION
Processing Exemption
The Taxpayers lend equipment to farmers during the cotton picking season. The farmers use this equipment to pick the cotton, build cotton "modules,' and load and transport the "modules' to the cotton gin. The "modules' are large, compressed blocks of raw cotton. A finished module measures approximately nine feet by nine feet by thirty feet in length and weighs about eight tons.
The Taxpayers maintain that the equipment used to build cotton modules qualifies for the processing exemption and that the building of the modules is the first step in the cotton ginning process. The equipment under appeal consists of boll buggies, module builders, and module retrievers. The Taxpayers are also appealing purchases of repair parts for this equipment that were held in the audit.
After the cotton is picked, boll buggies transport the cotton to a module building site. Here, the loose cotton is deposited into module builders. Module builders are large mechanized bins in which the loose cotton is compressed. When a module is completed, module retrievers are used to pick up the cotton module intact and transport it to the gin for processing. The completed modules are covered with specialized covers which hold the module together and protect it from the weather.
Code of Virginia Sec. 58.1-609.3(2)(iii) provides a sales and use tax exemption for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing ... products for sale or resale.'
"Manufacturing, processing, refining, or conversion'. is defined in Code of Virginia Sec. 58.1-602 to include:
The department has traditionally interpreted the above statute as limiting the exemption in Code of Virginia Sec. 58.1-609.3(2) to those activities conducted at a single plant site. Therefore, the exemption would not apply to machinery and equipment the Taxpayers purchase for use at various farm sites since the use does not occur at a single plant site.
The Taxpayers' activities are more analogous to the situation discussed in the enclosed copy of P. D. 91-99 (6/4/91). In this case, the department ruled that the use of a portable band saw did not qualify for the manufacturing exemption because the unit was moved to various customer sites to saw wood. The department did agree that such a unit used at a fixed site would qualify for the exemption. Based on the foregoing, the Taxpayers' purchases of boll buggies, module builders, and module retrievers do not qualify for the industrial processing exemption. These items were correctly held taxable in the audit.
Buildings
Taxpayer 2 purchased prefabricated buildings from an out-of-state company for use at its cotton ginning facility. Taxpayer 2 maintains that it contracted with the seller to erect and install the buildings, and the buildings became real property upon installation. Therefore, the seller of the buildings is a real property contractor and the taxable user and consumer of the tangible personal property that was incorporated into real property.
Based on the above, contractors are liable for sales and use tax on tangible personal property used in the performance of real property construction work in Virginia.
The auditor indicates that Taxpayer 2 was unable to provide a contract or other documentation to show that the seller of the buildings had also contracted to install the buildings. The auditor did note some evidence that Taxpayer 2 was paying another company (not the seller) to install the buildings. For this reason, Taxpayer 2 was held liable for use tax on the purchase price of the buildings.
Based on additional information presented, the seller of the buildings contracted with Taxpayer 2 to furnish, erect, and install the buildings. The seller subcontracted with another company to install the buildings, which became real property upon installation. Therefore, the seller was acting as the general contractor and is the taxable user and consumer of the tangible personal property used in the performance of real property construction work. The audit assessment will be adjusted to remove the purchases of the buildings.
The department's records indicate Taxpayer 1 has a balance due of ***** and Taxpayer 2 has an adjusted balance due of ***** I will allow the Taxpayers sixty days to remit the total amount due of ***** to ***** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If payment is not received within sixty days, the Taxpayers will be issued updated bills with accrued interest. If you have any questions concerning this determination, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13277S
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letters in which you seek the correction of assessments issued to ***** (Taxpayer 1), and ***** (Taxpayer 2), for the periods March 1991 through February 1997 and March 1996 through February 1997, respectively.
FACTS
Both Taxpayer 1 and Taxpayer 2 (collectively, the "Taxpayers') own and operate cotton ginning facilities in Virginia. The Taxpayers were audited by the department and assessed use tax on certain expense purchases and fixed asset purchases. The Taxpayers maintain that the assessment is erroneous because certain equipment and machinery purchases held in the audit qualify for the manufacturing exemption.
Taxpayer 2 also seeks the correction of an assessment made on the purchase of prefabricated buildings. Taxpayer 2 maintains that it contracted with the seller to install the buildings and the buildings became real property after installation. Therefore, the seller is a real property contractor that is responsible for payment of the tax on the buildings.
DETERMINATION
Processing Exemption
The Taxpayers lend equipment to farmers during the cotton picking season. The farmers use this equipment to pick the cotton, build cotton "modules,' and load and transport the "modules' to the cotton gin. The "modules' are large, compressed blocks of raw cotton. A finished module measures approximately nine feet by nine feet by thirty feet in length and weighs about eight tons.
The Taxpayers maintain that the equipment used to build cotton modules qualifies for the processing exemption and that the building of the modules is the first step in the cotton ginning process. The equipment under appeal consists of boll buggies, module builders, and module retrievers. The Taxpayers are also appealing purchases of repair parts for this equipment that were held in the audit.
After the cotton is picked, boll buggies transport the cotton to a module building site. Here, the loose cotton is deposited into module builders. Module builders are large mechanized bins in which the loose cotton is compressed. When a module is completed, module retrievers are used to pick up the cotton module intact and transport it to the gin for processing. The completed modules are covered with specialized covers which hold the module together and protect it from the weather.
Code of Virginia Sec. 58.1-609.3(2)(iii) provides a sales and use tax exemption for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing ... products for sale or resale.'
"Manufacturing, processing, refining, or conversion'. is defined in Code of Virginia Sec. 58.1-602 to include:
-
- the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site .... (Emphasis added).
The department has traditionally interpreted the above statute as limiting the exemption in Code of Virginia Sec. 58.1-609.3(2) to those activities conducted at a single plant site. Therefore, the exemption would not apply to machinery and equipment the Taxpayers purchase for use at various farm sites since the use does not occur at a single plant site.
The Taxpayers' activities are more analogous to the situation discussed in the enclosed copy of P. D. 91-99 (6/4/91). In this case, the department ruled that the use of a portable band saw did not qualify for the manufacturing exemption because the unit was moved to various customer sites to saw wood. The department did agree that such a unit used at a fixed site would qualify for the exemption. Based on the foregoing, the Taxpayers' purchases of boll buggies, module builders, and module retrievers do not qualify for the industrial processing exemption. These items were correctly held taxable in the audit.
Buildings
Taxpayer 2 purchased prefabricated buildings from an out-of-state company for use at its cotton ginning facility. Taxpayer 2 maintains that it contracted with the seller to erect and install the buildings, and the buildings became real property upon installation. Therefore, the seller of the buildings is a real property contractor and the taxable user and consumer of the tangible personal property that was incorporated into real property.
-
- Code of Virginia Sec. 58.1-610 states that:
-
- Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption.
Based on the above, contractors are liable for sales and use tax on tangible personal property used in the performance of real property construction work in Virginia.
The auditor indicates that Taxpayer 2 was unable to provide a contract or other documentation to show that the seller of the buildings had also contracted to install the buildings. The auditor did note some evidence that Taxpayer 2 was paying another company (not the seller) to install the buildings. For this reason, Taxpayer 2 was held liable for use tax on the purchase price of the buildings.
Based on additional information presented, the seller of the buildings contracted with Taxpayer 2 to furnish, erect, and install the buildings. The seller subcontracted with another company to install the buildings, which became real property upon installation. Therefore, the seller was acting as the general contractor and is the taxable user and consumer of the tangible personal property used in the performance of real property construction work. The audit assessment will be adjusted to remove the purchases of the buildings.
The department's records indicate Taxpayer 1 has a balance due of ***** and Taxpayer 2 has an adjusted balance due of ***** I will allow the Taxpayers sixty days to remit the total amount due of ***** to ***** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If payment is not received within sixty days, the Taxpayers will be issued updated bills with accrued interest. If you have any questions concerning this determination, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13277S
Rulings of the Tax Commissioner