Tax Type
Retail Sales and Use Tax
Description
Mining; Cement jobs.
Topic
Taxability of Persons and Transactions
Date Issued
02-05-1998
February 5, 1998
Dear*****:
This will reply to your letter in which you seek correction of the retail sales and use tax audit of ***** (the "Taxpayers') for the period of August 1994 through December 1994 and January 1995 through July 1997, respectively.
FACTS
The Taxpayers, a Delaware corporation and a Texas corporation, are registered sales and use tax dealers in the state of Virginia. The Taxpayers are in the business of selling tangible personal property and services to oil and natural gas well operators in Virginia. The Taxpayers conduct three basic lines of business: i) retail sales of cement products, acid products, and fracturing products; ii) performance of cement jobs, acid jobs, and fracturing jobs using their own products; and iii) performance of cement jobs, acid jobs, and fracturing jobs using products acquired from other sources. The definition of the above referenced jobs are listed below:
- Cement Jobs: The process of pumping a cementitious slurry into a gas or oil well through steel pipes to critical points in the annulus or open hole of a gas or oil well.
Acid Jobs: Pumping acid product into a gas or oil well and surrounding rock formation to increase its surface area and enhance production.
Fracturing Jobs: The process of forcing under high pressure glass beads, viscous fluids, nitrogen, and other materials into the well to stimulate gas or oil production.
The vast majority of the audit assessment at issue is the cement used in cement jobs that are part of the gas and oil production activities. The Taxpayers take the position that this is a function of a contracted exempt mining activity and exempt from the tax. The auditor held the property taxable as tangible personal property used by the Taxpayers in the provision of a service. The Taxpayers reserve their right to argue this point should the department find that the above functions do not enjoy the mining and mineral processing exemption afforded in Code of Virginia § 58.1-609.3(2)(iii) and Title 23 Virginia Administrative Code (VAC) 10-210-960.
DETERMINATION
Code of Virginia § 58.1-609.3(2)(iii) provides a sales and use tax exemption for machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy or supplies "used directly' in processing, refining, mining or converting products for sale or resale. This exemption is further explained by VAC 10-210-960, Mining and mineral processing. VAC 10-210-960 exempts tangible personal property used directly in mining and mineral processing. "Used directly' refers to those activities which are integral to the production of a product, including reclamation activities required by law on land which has previously been mined. Mining includes gas and oil drilling and other industrial removal of natural resources, minerals, or mineral aggregates from the earth.
In addition, VAC 10-210-960.E, Contracted activities, provides that mining and mineral processing extends to persons engaged in contracted mining activities provided that such activities qualify for the exemption set forth above and such activities are performed at the mine or mineral processing site.
Based on the information provided in your letter, and the statute and administrative code sections cited above, I find that the concrete jobs, acid jobs, and fracturing jobs described above would qualify for the mining and mineral processing exemption. Therefore, all materials used by the Taxpayers in performing these various jobs would be exempt. The auditor will contact the Taxpayers in order to make the necessary revisions to the audits and issue the appropriate refunds.
If you should have any further questions, please contact ***** Office of Tax Policy, at *****.
Rulings of the Tax Commissioner