Tax Type
Retail Sales and Use Tax
Description
Mining; Woodyard equipment.
Topic
Taxability of Persons and Transactions
Date Issued
02-06-1998
February 6,1998
Dear**:
This is in reply to your letter of December 29, 1997, in which you seek correction of the department's assessment issued to ***** (the "Taxpayer'), for the period January 1992 through August 1997.
FACTS
The Taxpayer currently operates two woodyards, and was a harvester of forest products through April 1995, at which time the logging division formed its own company. The department's audit disclosed that the Taxpayer purchased certain equipment and supplies which the department's auditor deemed to be subject to the application of the use tax. The Taxpayer contends that the property at issue is used directly in the harvesting of forest products, or in manufacturing, and requests that the audit be adjusted to remove the items in question.
DETERMINATION
Generally
Under Code of Virginia Sec. 58.1-609.2(6) an exemption from the sales and use tax is available for machinery and tools used directly in the harvesting of forest products. Title 23 of the Virginia Administrative Code (VAC) 10-210-700, copy enclosed speaks specifically to the harvesting of forest products and states that:
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- A harvester's direct use of machinery and tools, fuel, power, energy or supplies in the harvesting of forest products is exempt from the tax. A harvester's use of machinery and tools, fuel, power, energy, or supplies indirectly in the harvesting of forest products or in any other activity is subject to the tax. (Emphasis added)
- A harvester's direct use of machinery and tools, fuel, power, energy or supplies in the harvesting of forest products is exempt from the tax. A harvester's use of machinery and tools, fuel, power, energy, or supplies indirectly in the harvesting of forest products or in any other activity is subject to the tax. (Emphasis added)
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- Manufacturing,... includes 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...
With the foregoing in mind, I will respond to the issues stated in the Taxpayer's letter in the manner in which they were presented.
Prentice 325 Loader; 410DX Prentice Knuckleboom Loader:
The Taxpayer states that these items are used to get the product to the trucks for transporting. The Taxpayer contends that the equipment is used in harvesting forest products rather than the function of transporting.
As previously stated, machinery must be directly used in the harvesting of forest products to enjoy the available exemption. The department has consistently held that such property must be used within the statutory limits of the exemption. Accordingly, the terminology "direct use' significantly narrows the scope of the exemption to include only that tangible personal property used immediately in the harvesting of forest products.
Harvesting is "The act or process of gathering crops of any kind' as defined by Black's Law Dictionary, sixth edition. The American Heritage Dictionary, second college edition, then defines "gathering' to mean "To cause to come together ... to harvest or pick ... to collect into one place; assemble ....' The logs are dragged from the harvest site by a separate piece of equipment called a skidder to a collection point known as a loading deck. The loading deck is usually near a road for easy access by trucks. The equipment at issue then takes the logs from the piles at the loading decks and loads them onto trucks or trailers for transporting to a woodyard or mill. As the property in question is not used directly or immediately in the actual harvesting of the forest product, I cannot agree that such machinery is exempt of the tax. A copy of P.D. 82-140, 10/13/82, copy enclosed, further details the department's longstanding position.
Logging Mats; Pipes; Stone; and BLT Dozer:
The Taxpayer states that these items are used to create an access to the product to be harvested, and that without the supplies or equipment, the Taxpayer would not be able to harvest the forest products.
As provided in VAC 10-210-700, the exemption applies to equipment and supplies "directly used' in the immediate act of harvesting forest products. This same section further provides that machinery and supplies used in the clearing of land or in the construction of roads to open up a logging site are not directly used in the actual harvesting of the forest products. As a result, I do not find sufficient cause to adjust the department's audit for the items in question. I have enclosed Public Document (P.D.) 83-32, 02/28/83, which further details the department's longstanding policy with respect to above noted supplies and equipment.
Fertilizer, Atrazine, Dual, Etc; Orchard Grass:
These items, while used in a conservational effort to re-seed and replenish the environment and preserve the timber industry, are not used directly in the harvesting of forest products as outlined in VAC 10-210-700. I note that a copy of P.D. 95-20, 02/13/95, which addresses the direct use of such items, was given to the Taxpayer by the department's auditor. Based on the fact that such items do not play an immediate role in the harvesting of forest products, I cannot agree that such items qualify for the exemption under Code of Virginia Sec. 58.1-609.2(6).
Morbark 1050 Tub Grinder w/Knuckleboom; Parts for Morbark 1050:
The Taxpayer states that these items are used to change the state of wood waste to chips. The Taxpayer states that it is not an industrial woodyard operation, and that the chipping function is a small part of its business. The Taxpayer contends that the equipment is used in an exempt manufacturing operation, and that the tax is inapplicable.
In order for a business to be eligible for the manufacturing exemption, it must meet two tests. First, it must be manufacturing a product for sale or resale. Secondly, the production must be industrial in nature. Additionally, the statutory definition of "manufacturing' under the Retail Sales and Use Tax Act limits the industrial exemption to activities conducted at a single plant site. I note that while the Taxpayer satisfies the first requirement, its production of wood chips is not industrial in nature. I point to the fact that the Taxpayer itself states that it is "not an industrial woodyard operation,' and that the Taxpayer's equipment is mounted on a trailer for use at the Taxpayer's two woodyards in separate Virginia localities.
Under VAC 10-210-920, an industrial processor includes establishments engaged in the treatment of material, substances, or other products in such a manner as to render such products more marketable or useful. As a general rule, the department looks to the Standard Industrial Classification (SIC) Manual published by the U.S. Department of Commerce to determine those industries which qualify as "industrial processors or manufacturers.' Industrial processors and manufacturers encompass those industries included in, but not limited to, SIC codes 10 through 14 and 20 through 39.
I note that, effective April 1995, the Taxpayer's industrial logging operations split and formed its own company. As a result, and coinciding with that effective date, the Taxpayer's operations no longer fell within codes 10 through 14 or 20 through 39 of the SIC Manual. The Taxpayer's woodyard operations appear to fall under SIC code 51, group 5099, which addresses establishments engaged in the wholesale distribution of durable goods, including forest products. Accordingly, I find that the Taxpayer is not an industrial processor or manufacturer, and that the subject equipment was properly included in the department's audit.
Based on all of the foregoing, I find the department's assessments are correct as assessed. Please return your payment for the balance of tax, penalty and interest totaling ***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days. If payment is not received within that time, Interest will accrue on the balance due. If you should have any questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner