Tax Type
Retail Sales and Use Tax
Description
Forest products harvesting; Portable wood chip equipment etc.
Topic
Collection of Delinquent Tax
Exemptions
Property Subject to Tax
Date Issued
03-31-1999
March 31, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in reply to your letter in which you request a reconsideration of my prior response to your client, and seek the correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period January 1992 through August 1997. I apologize for the delay in our response.
FACTS
The Taxpayer operates two woodyards, and was a harvester of forest products until April 1995. At that time, the harvesting division separated itself from the Taxpayer, and formed its own company. The Taxpayer disagrees with the results of the audit conducted by the department and seeks a reconsideration of the assessment related to three issues: equipment used in the manufacture of wood chip fuel, equipment used in timber harvesting operations, and equipment subjected to the tax which the Taxpayer claims was used as collateral to ``secure' a debt owed by the Taxpayer to a creditor.
DETERMINATION
Generally
As related in my prior determination, Code of Virginia § 58.1-609.2(6) provides an exemption from the sales and use tax for machinery and tools used directly in the harvesting of forest products, while Title 23 of the Virginia Administrative Code (VAC) 10-210-700 supports the Code of Virginia in its interpretation. I note that the Taxpayer was provided with a copy of the regulation.
I shall respond to the Taxpayer's issues in the manner in which they were presented.
Manufacture of Wood Chips for Fuel
The Taxpayer states that certain machinery, tools and equipment are used to convert wood bi-products into wood chips which are sold to customers as fuel, and that the machinery, tools and equipment are used in an exempt manufacturing function. The Taxpayer also states that the equipment is portable for use in several locations of its woodyard, and can be transported and delivered for a similar use in one of its other woodyards. In support of its argument, the Taxpayer references two Public Documents, (P.D.'s) 93-214 (10/27/93) and 95-51 (3/23/95), where the taxpayers were also creating chips for fuel, and in which the operations were deemed ``industrial in nature' for purposes of the manufacturing exemption. The Taxpayer therefore contends that its similar process should also enjoy the exemption from the tax.
Manufacturing Exemption: Code of Virginia § 58.1-609.3.2(iii) provides 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 ... manufacturing ... products for sale or resale.' Code of Virginia § 58.1-602 then defines "manufacturing' as including:
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- ... 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...
- ... 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...
Based on the additional information provided, the Taxpayer's wood chipping operations are industrial in nature, with the equipment at issue being used at two separate production sites. As the Taxpayer is manufacturing a product for sale, in the industrial sense, there is cause to allow for an adjustment of the audit for the equipment and repair parts used directly in the Taxpayer's chipping operations.
Preponderance of Use Test: I note in this case, however, that the chipper serves both a taxable function and an exempt function. VAC 10-210-920(D) addresses machinery and equipment used in both taxable and exempt functions and provides that the department will look to the preponderance of use in order to determine whether the equipment is taxable or exempt. In this instance, I note that the Taxpayer is using its chipper at its customers' mill sites to clean up the residue timber, lumber and other wood related materials. Such activities do not jeopardize the exemption afforded to the manufacturing portion of the Taxpayer's business, unless the preponderance of the equipment's use is in a taxable activity. Consequently, if the chipper is determined to be used more than 50% in a services-oriented capacity, the manufacturing exemption will not apply and the chipper will be subject to the tax. I will have the department's auditor contact the Taxpayer to review its use of the chipper in its services to customers. If the chipper is used predominantly in a manufacturing activity, the auditor will review the Taxpayer's list of machinery and parts in order to determine their direct use for purposes of the exemption.
Timber Harvesting Equipment
The Taxpayer separates and addresses two types of equipment at issue, the Prentice 325 (325) and 410 DX Prentice Knuckleboom (410 DX), and the logging mats.
325 and 410DX: The 325 and the 410 DX are similar pieces of equipment in that both have a long mechanical arm, with a claw at the end of the arm, except that the 410 DX also has a saw built onto it. Once the trees have been severed from the land, they are pulled by a skidder to a loading deck, in this instance to the open area where the 325 and the 410 DX are located. The claw arm from either the 325 or the 410 DX picks up one of the trees and pulls it through the saw attached to the 410 DX, delimbing the tree. Once the tree is delimbed, the 325 or the 410 DX claw drops the log onto a trailer situated adjacent to the 410 DX. The trailer is then pulled from the open area by other equipment to the road where it is hauled to the woodyards. The Taxpayer contends that the equipment is used directly in harvesting forest products, and should be removed from the department's audit. In support of its contention, the Taxpayer references a prior ruling, P.D. 96-175 (7/19/96), which held that a bulldozer used in place of a skidder to pull logs out of the woods qualified for the exemption contained in the Code of Virginia.
The term "used directly' in Code of Virginia § 58.1-609.2(6) significantly narrows the scope of the exemption to include only those activities which are an integral part of the actual harvesting of the forest product. The functions of the 325 and the 410DX, while necessary to prepare the felled trees for transport, are operations which are a step removed from harvesting and are not used directly in the actual harvesting of the forest product.
With regard to P.D. 96-175, the referenced bulldozer was used in taxable farm and excavating activities, and since the taxpayer did not have a skidder to drag logs from the harvesting site, the taxpayer used its bulldozer for this function as well. Accordingly, the department's ruling allowed an exemption for the bulldozer to the prorated extent that it was used in an exempt activity.
In the Taxpayer's situation, "a skidder drags the tree (limbs and all) from the tree site to an open area.' Once in the open area (deck) the 325 and the 410DX begin the delimbing process loading the stripped trees onto trailers for movement to the road site for subsequent transport. This function, unlike the bulldozer in P.D. 96-175, is subsequent to the skidder's movement of the trees from the harvest site to the collection deck. Even if the 325 and the 410DX were the medium by which the logs were moved out of the woods from the harvest site, the exemption would apply only on a prorated basis because the delimbing activity is not considered an immediate function of the actual harvesting of the forest product. Consequently, the 325 and the 410DX were correctly included in the audit, and I find no basis for their removal.
Of equal importance is the fact that the Taxpayer's logging operations and its woodyard operations became separate and distinct corporations as of April 1995. The equipment for which the Taxpayer is seeking exemption was purchased by the woodyard operation in August of 1997, more than two years after the separation of the two entities. The equipment in question, while purchased by the Taxpayer, was provided to a separate corporation for use in its logging operations. Consequently, as the woodyard is not harvesting forest products, the exemption is unavailable. Accordingly, I find that the auditor properly held the equipment subject to the tax.
Logging Mats: The Taxpayer contends that the mats are used exclusively to stabilize the harvesting equipment which actually severs the trees. The Taxpayer states that because of the direct use of the mats in conjunction with exempt harvesting equipment, the mats are also used directly in the harvesting of the forest product and are exempt of the tax.
While I agree that the harvesting machinery requires a stable base, I cannot agree that the mats are "used directly' in a harvesting activity. The mats do not perform any of the activities related to harvesting. Instead, the logging mats are facilitative or convenient items providing traction for the harvesting equipment. As the logging mats are not an immediate part of the harvesting process, I do not find sufficient cause for the exclusion of the logging mats from the audit.
In addition, I would also note that relative to the separation of the two corporations in April 1995, the logging mat purchases all reflect purchase dates subsequent to the actual division of the two corporations. Consequently, as in the case with the 325 and the 410DX, a wholesale woodyard operation is not a harvester of forest products and the purchase of the logging mats would represent a taxable purchase in either instance. Accordingly, there is no basis for an adjustment of the department's audit for this issue.
Erroneous Entry on Purchases Exception List
In the auditor's purchases exception listing there is an August 1997 entry for a Prentice 325 (325), which lists a particular leasing firm as the vendor. The Taxpayer states that this is incorrect, and that the 325 is equipment which has been owned by the Taxpayer for a period of time greater than the alleged ``purchase date.' The Taxpayer states that it engaged in the sale of a Rome Mauler to an out-of-state company for a set price. However, the lien against the Rome Mauler exceeded the sales price. To insure that the difference would be secured, the Taxpayer offered the lienholder, the leasing company listed as the vendor in the purchases exception list, one of its other pieces of equipment, the 325, as collateral. The ``purchase' on the exception list merely represents the original purchase price of the Rome Mauler, and does not represent the purchase of the 325. The Taxpayer contends that the 325 "purchase' should be removed from the audit assessment.
Under the reason presented, I would agree that the equipment in question should not be listed in the purchases exceptions listing. However, the 325 was listed on the Taxpayer's equipment files which did not reflect the payment of the tax, and the Taxpayer did not provide the auditor with any documentation reflecting its contention. As the auditor will be reviewing the Taxpayer's records relative to the manufacturing exemption for the wood chipping operations, the Taxpayer should have a copy of the contract wherein the 325 has been assigned as collateral. Upon verification that there was no "purchase' the auditor will revise the audit accordingly.
1999 Virginia General Assembly
Of specific interest, the 1999 Virginia General Assembly passed Senate Bill 864, copy enclosed, which amends the agricultural exemption under Code of Virginia § 58.1-609.2(6). This bill expands the current exemption available to machinery used directly in the harvesting of forest products by applying the exemption to machinery used in certain pre-harvesting and post harvesting activities. If signed by the Governor, the provisions of this bill will become effective July 1, 1999.
Based on the foregoing, the audit will be returned to the district office for further review and revision. The department's auditor will contact the Taxpayer to establish a time convenient to both the Taxpayer and the department. All documentation necessary to complete the auditor's review should be readily available.
If you should have any additional questions regarding this matter, please contact ***** of the department's Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13911Q
Rulings of the Tax Commissioner