Tax Type
Retail Sales and Use Tax
Description
Public utility corporation engaged in the distribution of natural gas within Virginia
Topic
Collection of Delinquent Tax
Exemptions
Property Subject to Tax
Date Issued
04-16-1999
April 16, 1999
Re: § 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 January 1993 through December 1995. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a public utility corporation engaged in the distribution of natural gas within Virginia. The Taxpayer was audited and assessed tax, penalty, and interest on the purchase of items the Taxpayer believes are used directly in the rendition of its public utility service. The Taxpayer protests the assessment of tax on: (1) personal gas monitoring equipment, (2) Wacker Tampers, (3) steel plates, and (4) lighting fixtures. The Taxpayer also contests the assessment of audit penalty. These items and issues surrounding the contested areas will be discussed separately below.
DETERMINATION
Code of Virginia § 58.1-609.3(3) provides a retail sales and use tax exemption for "tangible personal property sold or leased to a public service corporation subject to a state franchise or license tax upon the gross receipts... for use or consumption... directly in the rendition of its public service.'
The above statute clearly states that tangible personal property must be used directly in the rendition of a utility's public service in order to gain the exemption. Interpreting the statute, Title 23 of the Virginia Administrative Code (VAC) 10-210-3020, copy enclosed, provides:
-
- Items of tangible personal property that are used directly in the rendition of a public utility service are those which are both indispensable to the actual provision of a utility service and used or consumed immediately in the performance of such service. The fact that a particular item may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in the rendition of a public utility service. (Emphasis added).
- Items of tangible personal property that are used directly in the rendition of a public utility service are those which are both indispensable to the actual provision of a utility service and used or consumed immediately in the performance of such service. The fact that a particular item may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in the rendition of a public utility service. (Emphasis added).
Personal Gas Monitoring Equipment
The Taxpayer purchased personal carbon monoxide detectors which are worn by the Taxpayer's service personnel to monitor the presence of carbon monoxide. The detectors are used to locate gases which are a by-product of the gas distribution system. The detectors are used by service personnel at residences or businesses to detect the presence of gases, or by maintenance personnel in preparation for work on gas mains. The detectors act as safety devices in order to ensure the safety of the utility workers. The Taxpayer believes that the carbon monoxide detectors are analogous to the methanometers and first aid supplies which were found to be exempt as "protective materials' in the Virginia Supreme Court case Commonwealth v. Wellmore Coal Corporation, 228 Va. 149, 320 S.E.2d 509 (1984).
A review of Footnote 4 from the Uniform System of Account for gas utilities in VAC 10-210-3020, reveals that tangible personal property which falls into the category of structures and general purpose equipment would be taxable. This footnote describes tangible personal property which falls in the category of structures and general purpose equipment to include safety equipment, except protective clothing worn by gas utility production, transmission, or distribution plant employees when furnished gratuitously by a utility.
In Commonwealth v. Wellmore Coal, the Virginia Supreme Court determined that methanometers and first aid supplies used directly in the actual mining and production process were exempt from the sales and use tax. This being the case, I agree that carbon monoxide detectors used in the natural gas mining or production process would be exempt from the tax in accordance with Commonwealth v. Wellmore Coal. However, carbon monoxide detectors used by service personnel to service customer owned equipment would not qualify for the exemption in accordance with Footnote 4 of the Uniform System of Accounts.
Wacker Tampers
The audit includes the purchase of Wacker Tampers used by the Taxpayer to complete the repair process of the pipeline distribution system. The Wacker Tampers are used to pack down soil and gravel when repairing underground pipelines. If the soil and gravel are not packed down upon completion of the underground work, the soil may settle and may cause the pipeline to shift, resulting in damage.
As provided above, in order for tangible personal property to be exempt from the tax, such property must be "used directly' in the rendition of the public service, i.e., the provision of natural gas. Based on the information provided, the Wacker Tampers are not used directly in the rendition of the public service. This position is supported by Footnote 4 (referenced above), which provides that the tax is applicable to commercial expenses, which include ground maintenance materials.
This position is also supported by Commonwealth v. Wellmore Coal, in which the Virginia Supreme Court ruled that material and equipment used in the reclamation activities are subject to the tax. The department takes the position that the packing of soil and gravel covering buried pipelines is analogous to the taxable reclamation activities performed by strip-mining companies ruled taxable in Commonwealth v. Wellmore Coal. Accordingly, I find no basis for removing Wacker Tampers from the audit findings.
Steel Plates
The Taxpayer purchased steel plates to use while repairing the gas pipeline distribution system. The steel plates are used to cover a construction site until such time as the hole can be filled with soil and road materials.
The department's position with respect to the steel plates follows the same line of reasoning as the Wacker Tampers set forth above. Footnote 4 provides that commercial expenses, which include grounds maintenance materials, are subject to the tax. Therefore, I find no basis for removing these items from the audit findings.
Lighting Fixtures
The Taxpayer purchased explode-proof lights for use in repair site work where natural gas may be present. The explode-proof lights are necessary not only to illuminate the repair area, but also to eliminate the potential of generating a spark which can cause an explosion. The Taxpayer believes that the explode-proof lights are used directly in the rendition of its public service and should be exempt from the tax.
Based on the information provided by the Taxpayer, it is apparent that the lights in question serve a dual purpose, both illumination and safety. Generally, illumination to perform repair work does not constitute a direct use in the rendition of a public service. However, due to the fact that the explode-proof lights provide a safe working environment for repairmen working on gas lines, I find that these lights, when used in a potentially hazardous area, may be purchased exempt of the tax. This is consistent with the position the department took in P.D. 93-42 (3/4/93), copy enclosed.
Audit Penalty
Audit penalty is addressed in VAC 10-210-2032, which provides that the application of penalty is based on whether a satisfactory level of tax compliance has been achieved. For third or subsequent audits of sales and use tax compliance, penalty will generally apply unless a taxpayer's compliance ratio meets or exceeds 85%.
It is apparent that once the audit revisions as outlined above are made, the Taxpayer's use tax compliance ratio will exceed the 85% threshold required for fourth generation audits. For this reason, the audit penalty will be abated.
In accordance with the above, I will allow the Taxpayer 60 days to provide a reasonable proration of taxable versus exempt use of the carbon monoxide detectors to the auditor. Once this information is provided, the audit will be adjusted accordingly and a revised bill will be issued to the Taxpayer. If you should have any questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16642K
Rulings of the Tax Commissioner