March 27, 2024
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period October 2013 through September 2019. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a Virginia business entity, engages in electronics dismantling and recycling. Under audit, the Department found that the Taxpayer had not properly charged, collected, or remitted retail sales and use tax on various transactions and issued an assessment for the unpaid tax liability, penalty, and interest. The Taxpayer timely appealed, asserting that its purchase of a forklift should be exempt from the use tax and requesting that all tax, penalties, and interest related to that item be abated.
DETERMINATION
Virginia Code § 58.1-609.3 provides an exemption from the retail sales and use tax for machinery, tools or repair parts used in manufacturing or processing. By definition, manufacturing and processing activities must be “industrial in nature” to qualify for the exemption. See Virginia Code § 58.1-602. In Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, (1980), the Virginia Supreme Court interpreted the term “processing” to mean the treatment of a product that makes it more marketable or useful. Both Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 1 and the decision in Orange-Madison make it clear that processing occurs only when a product is subjected to a treatment that makes it more marketable or useful.
In this case, the Taxpayer used a forklift, hard drive shredder, and rolling carts to shred obsolete computer hard drives, separate the useful materials from the waste, and sort each material into the appropriate containers for reclaiming. The auditor determined that the process qualified as processing because the obsolete hard drives were more marketable after the treatment. However, the auditor found that the forklift could be used for both exempt and non-exempt purposes and that not enough evidence was available to show the preponderance of its use.
In situations where an industrial processor uses a single piece of equipment in both a taxable and an exempt manner, Virginia Code § 58.1-609.3 2 provides that a preponderance of use rule determines the tax application. This rule is explained in Title 23 VAC 10-210-920 D, which states:
When a single item of tangible personal property is put to use in two different activities, one of which is an immediate part of the industrial production process (exempt) and the other of which is not (taxable), the sales and use tax shall apply in full when the preponderance of the item's use (fifty percent or more) is in non-exempt activities. Likewise, the item will be totally exempt from the tax if the preponderance of its use is in exempt production activities.
The Taxpayer concedes the forklift in question is utilized for multiple uses in the facility but argues that its principal use is the industrial processing activities. Because the auditor identified the shredder as equipment used in exempt industrial processing, were the forklift used exclusively in loading and unloading materials from this equipment, it would be exempt from the tax. However, because the forklift is used in multiple ways throughout the Taxpayer’s operations, the Department will apply the preponderance of use test to determine whether the primary use of the forklift is in exempt activities.
In holding the transactions related to the forklift taxable, the Department’s auditor indicates insufficient evidence was available to show preponderance of use. While its application for correction was being considered, the Taxpayer provided two affidavits, one from the primary operator of the forklift and one from the company’s president and owner, as well as various books and records to show that the forklift was utilized primarily in the exempt processing activities. The evidence provided supports finding that the preponderance of use of the forklift was in exempt industrial processing activities. Accordingly, the disputed transactions will be removed from the audit exceptions and resulting assessment.
While the Department finds in favor of the Taxpayer in this case, it is reminded that Virginia Code § 58.1-633 A requires every dealer to keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The record keeping requirements are further explained in Title 23 VAC 10-210-470.
The Code of Virginia sections and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****, or via email at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3673.C