January 18, 2023
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you request a ruling on the application of the Virginia retail sales and use tax to the Taxpayer’s purchase of equipment and construction materials.
FACTS
The Taxpayer is a Controlled Environment Agriculture Farm with plans to build a facility in Virginia. This facility encompasses a vertical farm operation that differs from traditional farming operations in that the lighting will be supplied via lighting systems and plants will be grown in an indoor, hydroponic environment. The Taxpayer will have two different spaces, one where produce is grown and another for operations. The Taxpayer requests a ruling on the application of the Virginia retail sales and use tax agricultural exemption on the purchase of tangible personal property and materials for use in its operations and the construction of its facility.
DETERMINATION
Agricultural Exemption
Virginia Code § 58.1-609.2.1 provides an exemption from the retail sales and use tax for persons in the business of producing agricultural products for market. The exemption applies to:
Commercial feeds; seeds; plants; fertilizers; liming materials; breeding and other livestock; semen; breeding fees; baby chicks; turkey poults; rabbits; quail; llamas; bees; agricultural chemicals; fuel for drying or curing crops; baler twine; containers for fruits and vegetables; farm machinery; medicines and drugs sold to a veterinarian provided they are used or consumed directly in the care, medication, and treatment of agricultural production animals or for resale to a farmer for direct use in producing an agricultural product for market; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor; and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production, which also includes beekeeping and fish, quail, rabbit and worm farming for market. [Emphasis added]
The intent of the above statute is to provide a sales and use tax exemption to a farmer who produces an agricultural product to be sold on the open market. Agricultural production generally involves the cultivation of soil, production of crops, and raising of livestock. The Taxpayer’s proposed operations will not involve the cultivation of soil, but instead will grow product in a closed and controlled hydroponic environment. However, because the operations involve the production of crops, the exemption may apply to some portions of the Taxpayer’s operations. The application of the agricultural exemption in Virginia Code § 58.1-609.2 1 to this type of operation appears to be an issue of first impression in Virginia.
In order for the exemption to apply, the tangible personal property must be used directly in the cultivation of produce for market. Property used on ancillary activities that support production do not qualify for the exemption. Additionally, the exemption cannot be applied to property that is considered to be a structural construction material. The term “structural construction materials” is not limited to the literal meaning of the term “structures,” but rather encompasses those materials which become a part of real property. As such, tangible personal property, which will become a part of real property at the time of its use and loses its tangible status, does not enjoy an exemption from the tax.
Title 23 of the Virginia Administrative Code (VAC) 10-210-50 sets forth the application of the tax to property used in agricultural production for market. Specifically, it states “the term ‘structural construction materials’ includes but is not limited to silos, barns and sheds, storage bins (not portable), greenhouses, including plastic covered houses; and electrical wiring, except for wiring running from special purpose equipment to an on-off switch; and plumbing. These items are subject to the tax. The term specifically excludes heating systems, power outage and water pressure alarm systems, ventilating systems, and irrigation lines, meaning these items are exempt from tax.
Structural Construction Materials Affixed to Real Property
In order to determine whether property is considered to be structural construction materials within the meaning of Title 23 VAC 10-210-50, it must be determined whether the property has been affixed to realty as stated in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550, 555, 172 S.E.2d 757, 761-762 (1970), and Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941). The three prong test used to determine if personal property has been affixed to realty so as to become part of the realty is as follows: (1) annexation of the property to the realty, (2), adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. In light of this case law, I will address the following materials and equipment specified in the ruling request.
Specially Designed Windows and Doors
The Taxpayer indicates that it will be installing “specially designed windows and doors that accommodate viewing and monitoring the growing plants safely from the outside” as the bright grow lights can damage eyesight. In general, windows are necessary to the functionality of a real property structure. As such, windows and doors are generally considered to be fixtures, and, therefore, do not qualify for the agricultural exemption. The specialized purpose for which they are designed would not negate their status as fixtures.
Integrated Plumbing, Electrical, Lighting and HVAC Systems
By their very nature, integrated systems for water, lighting, mechanical, and air circulation, are incorporated into and affixed onto real estate. The Taxpayer argues that the specialized nature of these systems, and the fact that they are necessary to bring their produce to market, qualifies them for the agricultural exemption. Again, these are systems generally required in order for a modern building to be functional. While the specialized attributes may be consideration as to the intention of the parties, the specialized nature or necessity of a particular piece of property is not a determinative factor in the three prong test established by Virginia’s courts and used by the Department to evaluate whether such property is tangible or realty. To extend the application of the agricultural exemption to cover these systems based solely on the Taxpayer’s claim would be contrary to the Department’s authority under Virginia Code § 58.1-203 to interpret and enforce existing laws.
Water Treatment Systems
The Taxpayer states that it will install nutrient systems in its CEA, which include a reverse osmosis unit, concentrate tanks, mixing tanks, filters, pumps, irrigation (fertigation) distribution piping, valves, controls, and irrigation return systems including collection basins, sumps and sediment control. As indicated above, such systems would be required to meet the requirements of the exemption.
Based on the description provided, the reverse osmosis unit appears to be factually similar to the water treatment system as discussed in Public Document (P.D.) 14-151 (8/28/2014). In the determination, the Department considered whether water treatment systems used in treating well water for iron and hardness for use in a greenhouse that produces plants for wholesale and retail was entitled to the agricultural exemption. The water treatment system was used to keep iron off the plants, which would result in a yellowing of the plants and make them less marketable and was not integrated into the real estate and maintained its nature as tangible personal property. The Department determined that, because the taxpayer was in the business of growing plants at its greenhouse and selling such plants on the wholesale and retail level, the water treatment equipment played an integral part in rendering the taxpayers plants more marketable and was essential to its business. However, the Taxpayer should be aware that, if the contemplated reverse osmosis system were to be installed in such a way as it became incorporated into the real estate, the agricultural exemption would not apply.
Tangible Personal Property
Virginia Code § 58.1-609.2 1 states that the Virginia retail sales and use tax does not apply to tangible personal property necessary for use in agricultural production for market. The exemption specifically states that it applies to seeds and plants themselves, as well as the containers used for packaging produce for market. The Taxpayer has requested guidance regarding a number of additional items, which are discussed in detail below.
Refrigerated Trailers and Refrigerated Storage Sea Cans
The Taxpayer requests guidance on whether refrigerated trailers and/or refrigerated storage sea cans that are used to preserve the produce post-harvest qualify for the agricultural exemption. In P.D. 98-8 (1/19/1998), the Department determined that customized trailers that were specially manufactured to accommodate and facilitate the care of turkey poults from the hatchery to the farms where they will be grown until ready for market were necessary for use in agricultural production for market. The temperature-regulated containers used to transport the baby poults maintain the integrity of the product by keeping the baby poults alive and preventing harm from coming to the poults during transportation. The customized trailers considered in P.D. 98-8 are substantially similar to the refrigerated trailers and/or sea cans described by the Taxpayer. If the trailers and sea cans are similarly used to transport the product for market, they could be entitled to the agricultural exemption.
Maintenance Machinery and Equipment
The Taxpayer also indicates that it will be purchasing “equipment, machinery, and robotics for cleaning, sterilizing, servicing, and maintaining equipment noted above” and believes that it qualifies as exempt for use in agricultural production. The Department has considered whether similar equipment was exempt pursuant to the exemption when used by farmers.
In P.D. 06-7 (1/19/2006), the Department determined that the exemption does not extend to welding equipment and industrial gases as those materials are used to facilitate the farmer’s activities and make repairs to exempt farming machinery, and are not used in agricultural production. This determination is consistent with P.D. 94-301 (9/29/1994), in which the Department ruled that the purchase of repair parts for service vehicles is taxable because such vehicles are not used to produce agricultural products, but to support exempt farming machinery. Based on its previous analysis, the Department would not likely consider equipment, machinery, and robotics for cleaning, sterilizing, servicing, and maintaining the growing operations equipment as outlined by the taxpayer to be eligible for the agricultural exemption.
Grow Room Sensors and Cameras
The Taxpayer indicates that it intends to install sensors and cameras in grow rooms that monitor light, humidity, plant characteristics, and grow conditions, and are integrated with software and data systems for data analytics, and requests guidance on whether these items would qualify for the agricultural exemption. Even if the sensors and cameras were installed in such a way as to preserve their status as tangible personal property, the Department is unable to find a basis to exempt the sensors and cameras as described.
As previously stated, Virginia Code § 58.1-609.2 1 requires that, in order to properly claim the exemption, the property in question must be used directly in the cultivation of produce for market. While the sensors and cameras at issue here may facilitate the Taxpayer’s farming activities, the exemption is administered based on agricultural production and not on the ancillary activities which support that production. For this reason, the sensors and cameras used in the grow rooms to monitor light, humidity, plant characteristics, and growing conditions do not appear to be eligible for the exemption.
CONCLUSION
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. That authority, however, does not extend to creating exemptions that do not exist under the laws of the Commonwealth. In addition, the Virginia courts have consistently required strict construction of sales tax exemptions; where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1972).
As outlined above, the statutory exemption is administered based on agricultural production and not on the ancillary activities that support that production, which include grow room sensors and cameras. Property that is incorporated into real estate in such a way as to become a permanent part of the realty is not eligible for the agricultural exemption, regardless of its specialized nature, including specially designed windows and doors, integrated plumbing, electrical, lighting, and HVAC systems. Property that retains its status as tangible personal property may be afforded the exemption, so long as it is necessary for use in agricultural production, which may include water treatment systems, refrigerated trailers, and storage sea cans as described above.
I trust the foregoing responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4190.A