Tax Type
Retail Sales and Use Tax
Description
Industrial processing exemption/Department does not audit and assess businesses for retaliatory purposes
Topic
Exemptions
Tangible Personal Property
Date Issued
03-22-2013
March 29, 2013
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This reply is in response to your reconsideration letter submitted on behalf of ***** and ***** (the "Taxpayers"), in which you request correction of the retail sales and use tax assessments issued for the period November 2004 through September 2009. I apologize for the delay in responding to your request.
FACTS
The Taxpayers are public water service corporations. As result of the Taxpayers' previous appeal, the Tax Commissioner determined the Taxpayers qualified as industrial processors pursuant to Va. Code § 58.1-609.3 2 and Public Document (P.D.) 10-198 (8/31/10). Accordingly, the audit was returned to the audit staff and all assessed purchases that qualified for the industrial processing exemption were removed from the audit.
In this reconsideration, the Taxpayers protest the assessment of the remaining purchases in the audit and present several arguments as support. The Taxpayers contend the assessed purchases used to transmit water from storage to the customer qualify for the industrial processing exemption. Additionally, the Taxpayers believe industrial processing includes quality control testing performed during the transmission process. The Taxpayers also state that purchases of chemicals and additives used in water treatment remain in the assessment. The Taxpayers further contend the assessed purchases are required by the Virginia Department of Health and to ensure as the water is transmitted for use in fire protection. Finally, the Taxpayers request that all attorney and administrative fees incurred during its appeals be included in the calculation of its rates.
DETERMINATION
Industrial Processing Exemption
As determined by the Tax Commissioner in the Taxpayers' prior appeal, the Taxpayers are deemed industrial processors and qualify for the manufacturing exemptions provided under Va. Code § 58.1-609.3 2. In this current appeal, the Taxpayers argue that water distribution is industrial processing and thereby qualifies for exemption.
Title 23 of the Virginia Administrative Code (VAC) 10-210-920 C 3 defines distribution as "the transport or conveyance of products after the completion of production and is not part of manufacturing or processing. Distribution includes the storage of a product subsequent to its production (other than storage at the plant site) and the actual transport of the product for sale. All tangible personal property used to convey, transport, handle, store, market or display finished products is taxable." The regulation goes on to state that such property includes "[t]angible personal property used to transport manufactured products to market or customers."
The Taxpayers extract water from the ground and transport it to a processing center where it is measured, metered and chemically treated. After the water has been processed, it is transported to a well storage tank. From the storage tank, the water is distributed to the customer. While in the distribution line, no additional processing occurs or chemicals are added.
After leaving the processing center and entering the well storage tank, the water is a finished product. No additional chemicals or additives are applied as the water is complete and ready for sale. As defined by the foregoing authorities, the transmission of water to the customer falls under distribution in accordance to Title 23 VAC 10-210920 C 3. As previously discussed, distribution activities are taxable.
The Taxpayers point out that the water is "tested, contained, certified and monitored all the way to the glass the customer drinks from." Although the water may be tested throughout distribution, testing and quality control are only deemed exempt activities during the manufacturing process in accordance with Title 23 VAC 10-210-920 C 2, which provides that testing and quality control on the production line are part of exempt production.
Based on the foregoing, the distribution of water to the Taxpayers' customers is not industrial processing and the tangible personal property used in water distribution does not qualify for the exemptions provided under Va. Code § 58.1-609.3 2. All purchases that qualified for the industrial processing exemption were removed from the revised audit and the Taxpayer was correctly assessed. Accordingly, I find there is no basis for adjustment.
Water Treatment
The Taxpayers assert that the remaining assessed purchases include items used for water treatment. In accordance with P.D. 10-198, all chemicals and additives used to purify and enhance the water were removed previously from the audit assessment.
Other Issues
The Taxpayers contend that purchases assessed in the audit are required by the Virginia Department of Health. Title 23 VAC 10-210-920 B instructs that the requirements of federal, state or local law do not automatically render the purchases made under such requirements tax exempt.
In the Taxpayers' previous appeal, the Tax Commissioner determined that, although certain purchases may be required by the Virginia Department of Health, those requirements do not make the purchases at issue exempt. The purchases must qualify for a specific exemption under the Virginia Retail Sales and Use Tax Act. Therefore, there is no basis to adjust the assessment on the basis that the purchases are mandated by the Virginia Department of Health.
The Taxpayers also argue that they supply water that is stored in fire hydrants at specific intervals and required levels of pressure to ensure public safety. Based on the discussion with a member of my staff, the Taxpayers believe this activity qualifies as exempt safety apparel in accordance with Title 23 VAC 10-210-920 C 2. However, the regulation provides the exemption for safety apparel gratuitously provided by the manufacturer to production line employees. This has no application to the Taxpayers' storage of water in fire hydrants. Accordingly, I find there is no basis to adjust the assessment in this instance.
The Taxpayers believe that the audit may have been conducted in response to a case held before the State Corporation Commission in which the Taxpayers were a party. The Taxpayers request that all remaining taxes in the assessment be dismissed, as there may be retaliatory misconduct on the part of the Department. In accordance with Va. Code § 58.1-1812, the Department conducts audits to ensure the correct remittance of the tax based on the taxpayer's business activity in Virginia. The Department does not audit and assess businesses for retaliatory purposes. Accordingly, I find there is no basis to adjust the assessment, in this instance.
Recovery of Tax
The Taxpayers desire to include all attorney and administrative costs incurred as a result of its appeals in its rate calculation that it submits to the State Corporation Commission. However, the Department has no jurisdiction over the amounts which may be included in the Taxpayers' rates to its customers. The Taxpayers should contact the State Corporation Commission for guidance as to the inclusion of the desired fees in its calculated rates.
CONCLUSION
Based on the foregoing, the assessments are correct and there is no basis for further revision. I understand the assessment for ***** has been paid. Therefore, the Department will issue an updated bill with interest accrued to date for *****. The bill should be paid within 30 days from the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections, regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this determination, please contact ***** at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5052431528.M
Rulings of the Tax Commissioner