September 16, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****:
This is in response to the letter submitted on behalf of ***** (the “Taxpayer”), in which you request correction of the retail sales and use tax assessments issued to the Taxpayer as a result of an audit for the period March 2011 through September 2015.
FACTS
The Taxpayer provides a variety of services primarily for the natural gas industry. The Taxpayer indicates that it is also engaged in farming activities, such as the purchase and sale of cattle. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property used or consumed in the Taxpayers operations. The Taxpayer takes exception to the use tax assessed on several items held in the audit. The contested items are set out as two issues below.
DETERMINATION
Virginia Code § 58.1-205 1 provides that “Any assessment of a tax by the Department shall be deemed prima facie correct.” This means that the burden of proof is upon the Taxpayer to establish with convincing evidence a correction to an assessment. For appeals to court, it is the burden of the applicant to show that the contested assessment is erroneous or otherwise improper. See Virginia Code § 58.1- 1821 D.
Fencing
The Taxpayer contests the inclusion of line items 3-10 in the contested purchases exception list. The Taxpayer indicates it engaged a fencing vendor to furnish and install fencing materials. Although the vendor did not detail its services, the Taxpayer contends that the lump-sum charges are for the purchase of taxable fencing materials and exempt labor and installation. The Taxpayer correctly notes that installation labor is exempt of the sales and use tax under Va. Code § 58.1-609.5 2 if the amount is separately charged. Based on the “separately charged” requirement, the Taxpayer is attempting to obtain a revised invoice or similar statement from the vendor that indicates the amount of installation labor involved in connection with the items at issue.
The term “sale” is defined by Va. Code § 58.1-602 to mean “any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication . . . .” [Emphasis added.] Virginia Code § 58.1-602 also defines the term “sales price” to mean “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, . . without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.” [Emphasis added.] Thus, all services that are sold in connection with the taxable sale of tangible personal property are subject to the retail sales and use tax. The only services that are nontaxable are those that are specifically exempted or excluded from the retail sales and use tax.
Based on the foregoing, a taxable service would be any fabrication labor utilized in cutting or shaping fencing materials. Drilling holes into such to prepare the materials for erection is also considered a taxable service. By contrast, a nontaxable service would be “a separately charged amount” for labor or services rendered for installing property sold or rented. See Va. Code § 58.1-609.5 2. Thus, exempt installation labor would consist of a separately stated amount for labor rendered in placing fencing materials into position at the work site and securing them in place. When installation labor is not separately charged on an invoice but is included in a lump-sum amount for parts and labor, it is taxable as part of a taxable sale of tangible personal property.
While the Taxpayer contends that the installation labor would likely consist of 60-75% of the total cost of the contested transactions, no evidence has been furnished in support of the Taxpayer's claim. Although you indicate that such evidence would be forwarded to the Department as soon as it becomes available, such evidence has not been made available during the months following the filing of the appeal. Furthermore, I understand that the Taxpayer was previously given the opportunity by the Department's auditor to provide a corrected invoice from the vendor showing the separate charge for the installation labor but failed to do so. Because the Taxpayer has not met its required burden of proof, line items 3-10 of the contested purchases exception list will remain in the audit.
Agricultural Exemption Claim
The Taxpayer contests the inclusion of a tractor and loader in the audit. When the loader is attached to the front of the tractor, I understand that such equipment may be used to lift, transport and redeposit various materials, such as dirt, debris, feed, sand and gravel. The Taxpayer maintains that the contested equipment is used in exempt agricultural production activities, such as the purchase and sale of cattle.
Virginia Code § 58.1-609.2 1 provides an exemption from the retail sales and use tax for:
breeding and other livestock; . . . farm machinery; . . . 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 . . . . [Emphasis added.]
The Taxpayer provides no description of how it used the contested equipment in farming or in other activities. As for where such equipment is used, the Taxpayer's owner asserts that the contested equipment never left the farm, which would appear to be the Taxpayer owner's farm. No other information is provided about the farm. No evidence (sales agreement, local real estate tax assessments, etc.) is provided to establish that the farm was owned by the Taxpayer. It is also unclear as to what personnel used the contested equipment in 2012 through September 2015, i.e., the period from the date of purchase of the contested equipment until the end of the audit period. If such equipment was used on the farm, it is unclear whether such use was made by the Taxpayer's personnel only, the Taxpayer's owner, or personnel working for the farm. Despite all of the foregoing, the Taxpayer's contention appears to be that the contested equipment is used solely in farming operations.
In connection with this issue, the auditor examined the federal income tax returns filed by the Taxpayer and discovered that the Taxpayer made an initial farm investment in 2009 that was carried as “other assets” on its books until 2013. The Taxpayer informed the auditor that it had positive farm income for the years 2012, 2013 and 2014. While it appears that the cattle sales were reported for federal income tax purposes for 2012 and 2013, it is not clear whether the cattle sales for 2014 were reported for federal income tax purposes because the gross receipts reported for federal income tax purposes are significantly less than the amount of income shown on the Taxpayer's expense breakdown spreadsheet. In examining the federal income tax returns, the auditor could not identify any purchases of farm-related expenses or farm assets until the examination of the Taxpayer's 2014 federal income tax return.
While the Taxpayer claims to have purchased the contested equipment for cattle farming purposes, the auditor could find no evidence that the Taxpayer owned the cattle despite the fact that cattle sales were reported for federal income tax purposes. The question of ownership is raised because the Taxpayer furnished receipts from 2013 indicating that check payments for cattle sold via a livestock broker were made out to the Taxpayer's owner and to the farm. These payments provide compelling evidence that the Taxpayer's owner and the farm had legal title to the cattle that allowed them to transfer ownership to the buyers of the cattle for a consideration.
This payment evidence provides no indication that the Taxpayer was the co-owner or full owner involved in these cattle sales. Furthermore, no evidence has been furnished that these cattle were purchased by the Taxpayer and remained the sole property of the Taxpayer until sold by the livestock broker or other seller. Accordingly, I am not convinced that the owner of the cattle was the Taxpayer, a separately incorporated legal entity. Moreover, in the absence of convincing evidence to the contrary, I must conclude that the Taxpayer's owner and the farm did not sell the cattle on behalf of the Taxpayer.
Moreover, no evidence has been furnished with respect to cattle purchases and other sales occurring during the audit period. Because the auditor requested additional information about the farm's income and was only provided the 2013 payment evidence, it appears that such evidence may be indicative of other cattle sales made in other years occurring during the audit period. As such, it appears that the Taxpayer did not own any of the cattle. Without ownership of the cattle, the Taxpayer cannot claim that it is a farmer who purchased cattle for use in agricultural production as required by the statutory language of the agricultural production exemption. Under these circumstances, the agricultural production exemption cannot apply to the Taxpayer's purchases, and thus the contested equipment will remain in the audit.
Because the contested equipment did not leave the farm and thus was not used off site, I must conclude, in the absence of evidence to the contrary, that such equipment was not used for any functions carried out in the Taxpayer's natural gas well reclamation operations or in other exempt activities.
CONCLUSION
Based on this determination, the assessments are correct. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this matter, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6271682935.R