Tax Type
Retail Sales and Use Tax
Description
Offsite quality control laboratory; Pollution control equipment; Employee meal subsidy; Fuel oil proration; First use of asset
Topic
Property Subject to Tax
Date Issued
11-30-1998
November 30, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer') for the period of August 1992 through June 1995. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a vertically-integrated producer of poultry. The Taxpayer contracts with growers to house and feed Taxpayer owned poultry. The Taxpayer provides the feed, vaccination, veterinary assistance, as well as financial assistance, to the growers. The Taxpayer owns its own feed mill and hatchery to support it growing operation and provides delivery of both feed and poultry in company owned trucks. In addition, the Taxpayer operates an over-the-road live haul operation to transport mature poultry from the farms to the Taxpayer's processing plants. The Taxpayer is seeking relief from the recent sales and use tax audit. The areas of exception are outlined below.
1. Payments made to *****: The Taxpayer is under contract with ***** (the "Provider') to provide food services in the Taxpayer's employees' cafeteria. The auditor held the fees charged by the Provider as a taxable subsidy in connection with the payment of employees' meals. Without the subsidy fee, employee meals would cost significantly more. The Taxpayer claims that the fee is strictly for services in running the cafeteria and does not include the provision of ***** personal property. The Taxpayer is requesting that these fees be removed from the audit findings.
2. Fixed Assets for use in Taxpayer's Quality Control Laboratory: The Taxpayer operates a quality control laboratory at a separate site away from the processing plant. In the previous audit, fixed assets used at this location were assessed because they did not qualify as production line quality control. The Taxpayer appealed this issue and the appeal was denied by the Tax Commissioner's letter dated November 2, 1994. Since a response to the Taxpayer's appeal was not received until 26 months into the current audit period, the Taxpayer is requesting relief of the tax attributable to the quality control laboratory for the current audit.
3. Fixed Assets Delivered to Virginia but used at Taxpayer's West Virginia Plant Site: Many of the Taxpayer's fixed assets that are to be used at their West Virginia plant site are delivered to or picked up in Virginia. This was an issue in the last audit and Taxpayer was advised that when possession of tangible personal property takes place in Virginia that the Virginia tax is applicable. The Taxpayer believes that they acted in good faith in attempting to accrue use tax on these items and is requesting consideration for relief in this area.
4. Fuel Oil Proration - ***** The Taxpayer uses fuel oil both directly in the processing of poultry and also to heat the plant and administrative offices. The Taxpayer believes the percentage calculations by the auditor for taxable use are too high and is requesting that a lower percentage, as calculated by the Taxpayer, be used.
5. Certified Pollution Control Equipment: The Taxpayer has implemented two different pollution control projects, one for air and the other for water. These projects have not been certified by the Department of Environmental Quality. The Taxpayer is requesting that tangible personal property incorporated into these projects be removed from the audit.
6. Audit Penalty Waiver: Due to extensive corporate changes over the last six years, and the effort exhibited by the Taxpayer to comply with Virginia tax laws, the Taxpayer is requesting that all audit penalties be waived.
DETERMINATION
Code of Virginia Sec. 58.1-609.5(1) provides an exemption from the retail sales and use tax for, "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made....' This exemption is interpreted by the department in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 (copy enclosed) in which the department sets forth the "true object' test in order to determine whether a transaction is subject to the tax. Subsection D of the regulation provides for the following:
In the present case, the Taxpayer contracts with the Provider for the provision of meals to employees in the employees' cafeteria. The Taxpayer maintains that it pays to the Provider a management fee for the provision of their services, none of which is attributable to the payment for food. Title to all food, supplies, and necessities used in preparing the food remains with the Provider until such time that the Provider sells meals to employees. However, information provided by the auditor indicates that the expenses associated with this issue are described as "Cost of cafeteria worker' or "Labor to fry chicken.' This would indicate that the Taxpayer is paying a portion of the meal preparation overhead directly to the Provider, thus subsidizing the price of the employees' meals. In that case, the fees would be considered part of the sales price of the food sold and would be taxable charges to the Taxpayer.
The "true object' of the transactions at issue is dependent upon the contractual arrangement between the Taxpayer and the Provider. Therefore, the Taxpayer must provide a copy of the contract before this issue can be resolved. Please send a copy of the contract to *****. If the contract is not provided within 60 days from the date of this letter, the assessment relating to payments to the Provider will be deemed correct as issued.
Fixed Assets for use in Taxpayer's Quality Control Laboratory
VAC 10-210-920(C)(2) (copy enclosed) provides that equipment used for production line testing and quality control is exempt from taxation. The department has interpreted this regulation to include only that equipment which is "used directly' in the quality control function on the production line of the plant site during the manufacturing process.
It was determined during the last audit that the quality control laboratory in question was located away for the production line plant site and that tangible personal property used at this location was taxable. The Taxpayer was advised of this at the conclusion of the last audit, and the department's position was reconfirmed by the Tax Commissioner's determination letter issue on November 2, 1994.
While I realize that a formal determination was not issued by the department until November 2, 1994, the Taxpayer was advised by the auditor at the conclusion of the last audit that the quality control laboratory was taxable. In addition, the regulation clearly states that equipment used for production line quality control is exempt. This provision of the regulation has been in place since 1979. For this reason, I find no basis for removing tangible personal property used at the quality control laboratory from the current audit.
Fixed Assets Delivered to Virginia but used at Taxpayer's West Virginia Plant Site
This has been an ongoing issue with the Taxpayer that had been addressed in the previous audit. Based on information furnished by the auditor, the Taxpayer attempted to resolve this problem by issuing an internal memo instructing employees that the Virginia tax was applicable to tangible personal property delivered to Virginia plant sites for subsequent shipment out of state. While I recognize that the Taxpayer did make an effort to resolve this issue, I cannot agree to grant relief for the taxes legally due to Virginia.
Fuel Oil Proration
Based on calculations by the Taxpayer, taxable use of fuel oil at the is 6.5% of total usage. According to the auditor and his calculations, the taxable usage of fuel oil at this plant is 16.08%. I will agree to compromise the taxable portion of the fuel oil at the ***** at 11%. In the future, however, the taxable and exempt use of fuel oil by the Taxpayer should be examined on an annual basis and the use tax remittance should be adjusted accordingly. The Taxpayer should maintain documentation supporting the prorated amounts.
Certified Pollution Control Equipment
Code of Virginia Sec. 58.1-609.3(9) provides a sales and use tax exemption for certified pollution control equipment and facilities as defined in Sec. 58.1-3660.' Code of Virginia Sec. 58.1-3660 defines certified pollution control equipment and facilities as follows:
For purposes of this exemption, the "state certifying authority' is the Department of Environmental Quality (DEQ). Upon certification of the equipment in question from DEQ, and notification to the Department of Taxation, the appropriate refunds will be Issued.
Audit Penalty Waiver
The Taxpayer's corporate structure is the result of a merger of two subsidiaries which operated under the same Parent company. Due to the new corporate structure, the Taxpayer is requesting that the current audit be treated as a first generation audit for purposes of computing the audit penalty.
Title 23 VAC 10-210-2032 (copy enclosed) addresses audit penalty and subsection A(1)(c) states, in part, that "audits performed for periods subsequent to business mergers, absorptions and like ventures, where the intent is to diversify or expand, will not qualify for first generation audit status.' Accordingly, I cannot agree to treat the current audit of the Taxpayer as a first generation audit.
This regulation goes on to provide that in order for penalty to be waived, use tax compliance must be 60% on second generation audits and 85% on third generation and all subsequent audits. Due to the fact the use tax compliance on the present audit is 37%, and there is no evidence of exceptional mitigating circumstances in this case, there is no basis to waive the audit penalty.
Based on all of the above, the audit will be referred back to the auditor for revision. Once the revisions are made, the Taxpayer will receive an updated bill. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13812K
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer') for the period of August 1992 through June 1995. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a vertically-integrated producer of poultry. The Taxpayer contracts with growers to house and feed Taxpayer owned poultry. The Taxpayer provides the feed, vaccination, veterinary assistance, as well as financial assistance, to the growers. The Taxpayer owns its own feed mill and hatchery to support it growing operation and provides delivery of both feed and poultry in company owned trucks. In addition, the Taxpayer operates an over-the-road live haul operation to transport mature poultry from the farms to the Taxpayer's processing plants. The Taxpayer is seeking relief from the recent sales and use tax audit. The areas of exception are outlined below.
1. Payments made to *****: The Taxpayer is under contract with ***** (the "Provider') to provide food services in the Taxpayer's employees' cafeteria. The auditor held the fees charged by the Provider as a taxable subsidy in connection with the payment of employees' meals. Without the subsidy fee, employee meals would cost significantly more. The Taxpayer claims that the fee is strictly for services in running the cafeteria and does not include the provision of ***** personal property. The Taxpayer is requesting that these fees be removed from the audit findings.
2. Fixed Assets for use in Taxpayer's Quality Control Laboratory: The Taxpayer operates a quality control laboratory at a separate site away from the processing plant. In the previous audit, fixed assets used at this location were assessed because they did not qualify as production line quality control. The Taxpayer appealed this issue and the appeal was denied by the Tax Commissioner's letter dated November 2, 1994. Since a response to the Taxpayer's appeal was not received until 26 months into the current audit period, the Taxpayer is requesting relief of the tax attributable to the quality control laboratory for the current audit.
3. Fixed Assets Delivered to Virginia but used at Taxpayer's West Virginia Plant Site: Many of the Taxpayer's fixed assets that are to be used at their West Virginia plant site are delivered to or picked up in Virginia. This was an issue in the last audit and Taxpayer was advised that when possession of tangible personal property takes place in Virginia that the Virginia tax is applicable. The Taxpayer believes that they acted in good faith in attempting to accrue use tax on these items and is requesting consideration for relief in this area.
4. Fuel Oil Proration - ***** The Taxpayer uses fuel oil both directly in the processing of poultry and also to heat the plant and administrative offices. The Taxpayer believes the percentage calculations by the auditor for taxable use are too high and is requesting that a lower percentage, as calculated by the Taxpayer, be used.
5. Certified Pollution Control Equipment: The Taxpayer has implemented two different pollution control projects, one for air and the other for water. These projects have not been certified by the Department of Environmental Quality. The Taxpayer is requesting that tangible personal property incorporated into these projects be removed from the audit.
6. Audit Penalty Waiver: Due to extensive corporate changes over the last six years, and the effort exhibited by the Taxpayer to comply with Virginia tax laws, the Taxpayer is requesting that all audit penalties be waived.
DETERMINATION
-
- I will address each issue in the same sequence as presented above.
- I will address each issue in the same sequence as presented above.
Code of Virginia Sec. 58.1-609.5(1) provides an exemption from the retail sales and use tax for, "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made....' This exemption is interpreted by the department in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 (copy enclosed) in which the department sets forth the "true object' test in order to determine whether a transaction is subject to the tax. Subsection D of the regulation provides for the following:
-
- If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
In the present case, the Taxpayer contracts with the Provider for the provision of meals to employees in the employees' cafeteria. The Taxpayer maintains that it pays to the Provider a management fee for the provision of their services, none of which is attributable to the payment for food. Title to all food, supplies, and necessities used in preparing the food remains with the Provider until such time that the Provider sells meals to employees. However, information provided by the auditor indicates that the expenses associated with this issue are described as "Cost of cafeteria worker' or "Labor to fry chicken.' This would indicate that the Taxpayer is paying a portion of the meal preparation overhead directly to the Provider, thus subsidizing the price of the employees' meals. In that case, the fees would be considered part of the sales price of the food sold and would be taxable charges to the Taxpayer.
The "true object' of the transactions at issue is dependent upon the contractual arrangement between the Taxpayer and the Provider. Therefore, the Taxpayer must provide a copy of the contract before this issue can be resolved. Please send a copy of the contract to *****. If the contract is not provided within 60 days from the date of this letter, the assessment relating to payments to the Provider will be deemed correct as issued.
Fixed Assets for use in Taxpayer's Quality Control Laboratory
VAC 10-210-920(C)(2) (copy enclosed) provides that equipment used for production line testing and quality control is exempt from taxation. The department has interpreted this regulation to include only that equipment which is "used directly' in the quality control function on the production line of the plant site during the manufacturing process.
It was determined during the last audit that the quality control laboratory in question was located away for the production line plant site and that tangible personal property used at this location was taxable. The Taxpayer was advised of this at the conclusion of the last audit, and the department's position was reconfirmed by the Tax Commissioner's determination letter issue on November 2, 1994.
While I realize that a formal determination was not issued by the department until November 2, 1994, the Taxpayer was advised by the auditor at the conclusion of the last audit that the quality control laboratory was taxable. In addition, the regulation clearly states that equipment used for production line quality control is exempt. This provision of the regulation has been in place since 1979. For this reason, I find no basis for removing tangible personal property used at the quality control laboratory from the current audit.
Fixed Assets Delivered to Virginia but used at Taxpayer's West Virginia Plant Site
This has been an ongoing issue with the Taxpayer that had been addressed in the previous audit. Based on information furnished by the auditor, the Taxpayer attempted to resolve this problem by issuing an internal memo instructing employees that the Virginia tax was applicable to tangible personal property delivered to Virginia plant sites for subsequent shipment out of state. While I recognize that the Taxpayer did make an effort to resolve this issue, I cannot agree to grant relief for the taxes legally due to Virginia.
Fuel Oil Proration
Based on calculations by the Taxpayer, taxable use of fuel oil at the is 6.5% of total usage. According to the auditor and his calculations, the taxable usage of fuel oil at this plant is 16.08%. I will agree to compromise the taxable portion of the fuel oil at the ***** at 11%. In the future, however, the taxable and exempt use of fuel oil by the Taxpayer should be examined on an annual basis and the use tax remittance should be adjusted accordingly. The Taxpayer should maintain documentation supporting the prorated amounts.
Certified Pollution Control Equipment
Code of Virginia Sec. 58.1-609.3(9) provides a sales and use tax exemption for certified pollution control equipment and facilities as defined in Sec. 58.1-3660.' Code of Virginia Sec. 58.1-3660 defines certified pollution control equipment and facilities as follows:
-
- "Certified pollution control equipment and facilities' shall mean any property, including real or personal property, equipment, facilities, or devices, used primarily for the purpose of abating or preventing pollution of the atmosphere or waters of the Commonwealth and which the state certifying authority having jurisdiction with respect to such property has certified to the Department of Taxation as having been constructed, reconstructed, erected, or acquired in conformity with the state program or requirements for abatement or control of water or atmospheric pollution or contamination.
For purposes of this exemption, the "state certifying authority' is the Department of Environmental Quality (DEQ). Upon certification of the equipment in question from DEQ, and notification to the Department of Taxation, the appropriate refunds will be Issued.
Audit Penalty Waiver
The Taxpayer's corporate structure is the result of a merger of two subsidiaries which operated under the same Parent company. Due to the new corporate structure, the Taxpayer is requesting that the current audit be treated as a first generation audit for purposes of computing the audit penalty.
Title 23 VAC 10-210-2032 (copy enclosed) addresses audit penalty and subsection A(1)(c) states, in part, that "audits performed for periods subsequent to business mergers, absorptions and like ventures, where the intent is to diversify or expand, will not qualify for first generation audit status.' Accordingly, I cannot agree to treat the current audit of the Taxpayer as a first generation audit.
This regulation goes on to provide that in order for penalty to be waived, use tax compliance must be 60% on second generation audits and 85% on third generation and all subsequent audits. Due to the fact the use tax compliance on the present audit is 37%, and there is no evidence of exceptional mitigating circumstances in this case, there is no basis to waive the audit penalty.
Based on all of the above, the audit will be referred back to the auditor for revision. Once the revisions are made, the Taxpayer will receive an updated bill. If you should have any questions concerning this determination, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13812K
Rulings of the Tax Commissioner