Tax Type
Retail Sales and Use Tax
Description
Asphalt-paving contractor; tax assessed on purchases of three fixed assets
Topic
Accounting Periods and Methods
Manufacturing Exemption
Date Issued
08-25-2004
August 25, 2004
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear *****:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period January 2000 through September 2002. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an asphalt-paving contractor. An audit resulted in tax assessed on purchases of three fixed assets.
The Taxpayer contests the tax applied to asphalt plant equipment and a wheel loader (i.e., the contested equipment) purchased in September and October 2000. I understand that the Taxpayer booked the contested equipment as assets and depreciated them on its books and tax returns. I also understand that the contested equipment was still on the Taxpayer's books at the time of the Department's audit in October 2002. Although the Taxpayer agreed to purchase the contested equipment in 2000, the Taxpayer indicates, "the papers were not drawn up until the beginning of 2001." The Taxpayer also indicates that it took more than nine months to transport, assemble, test and fine-tune the contested equipment after its purchase.
On March 1, 2002, the Taxpayer formed a separate legal entity ***** to produce asphalt for sale to customers using the contested equipment. Although the Taxpayer owns the contested equipment, it never actually used the contested equipment to produce asphalt. Rather, the Taxpayer purchased all asphalt used for its consumption in paving contracts from other asphalt producers.
Because the contested equipment is used by another entity to produce asphalt primarily for sale to consumers, the Taxpayer maintains that the contested equipment qualifies for the industrial manufacturing exemption pursuant to Virginia Code § 58.1609.3(2).
DETERMINATION
Industrial manufacturing exemption
The retail sales and use tax is generally imposed on the retail sale of tangible personal property. The only exceptions to that general tax rule are set out in exemption statutes, such as the industrial manufacturing exemption found at Va. Code § 58.1609.3(2)(iii) for machinery or tools used directly in manufacturing products for sale.
In this case, the Taxpayer is not the one actually using the contested equipment in an exempt manufacturing process. Rather, it is another legal entity that actually uses the equipment in an exempt manufacturing process. Under these circumstances, the industrial manufacturing exemption does not apply to the Taxpayer's purchases of contested equipment because it is not the one making an exempt use of the equipment.
Taxable use
Virginia Code § 58.1-603 imposes the retail sales tax upon the gross sales price of each item or article of tangible personal property when sold at retail or distributed in Virginia. Virginia Code § 58.1-602 defines the term "sale" as "any transfer of title or possession...of tangible personal property... for a consideration ...." [Emphasis added.] This statute also defines the terms "retail sale" and "sale at retail" as "a sale to any person for any purpose other than for resale in the form of tangible personal property ...." Accordingly, a retail sale occurs when title to, or possession of, goods transfers to the final purchaser for a consideration. In this case, the purchases of contested equipment by the Taxpayer constitute retail sales to the Taxpayer.
In addition, Virginia Code § 58.1-603 imposes the sales tax upon the cost price of tangible personal property stored in Virginia for use or consumption in Virginia. Virginia Code § 58.1-602 defines "storage" to mean "any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than sale at retail in the regular course of business." This statute also defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof ...." Pursuant to the broad statutory definitions of "use" and "storage," the Taxpayer is deemed to have made a taxable use, consumption or storage of property because it exercised its rights of ownership over the property when the property was delivered into Virginia. For example, the storage and assembly of the contested equipment in Virginia by the Taxpayer are sufficient actions to create a taxable obligation for the Taxpayer. See P.D. 96-324 (11/8/96).
Resale exemption is not applicable
The resale exemption applies to tangible personal property purchased for resale purposes only. In this case, I understand that title to the contested equipment was not transferred to the other related entity during the audit period. Rather, the Taxpayer depreciated the contested equipment as assets on its books for the years 2001 and 2002. By depreciating the equipment, the Taxpayer treats the contested equipment as operational expenses and thereby declares their use in its business. Accordingly, because the contested equipment was not purchased for resale purposes only, the resale exemption is not applicable.
CONCLUSION
Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter.
Virginia Code sections, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
- Sincerely,
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AR/45047R
Rulings of the Tax Commissioner