82-118 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Application of interest to tax deficiencies

Topic

Appropriateness of Audit Methodology

Basis of Tax

Date Issued

08-24-1982

August 24, 1982

Re: 58-1118 Application/Use Tax

Dear***********************

This letter will respond to the issues raised in your March 22, 1982 correspondence and subsequent meetings of June 16 and July 20, 1982 in which you apply for correction of use tax assessed against the************** as the result of an audit.

Facts

**************(hereinafter *************) is an industrial processor of pulp and paper products. *********** also harvests the raw forest products used in the processing operation. Use tax was assessed and is contested by ************* on numerous items, which are enumerated and described below:

1) Culverts and Stone. These items are used in harvesting the timber. Both items are used in constructing roadways or access paths (which may be temporary) to give heavy harvesting equipment access to the timber.

2) Waste Containers and Crawler Loaders. Both items are used in the disposal of production line waste. The waste containers are positioned near the production line and "catch" the sludge which is a by-product of pulp processing. These containers are then loaded onto a flatbed truck which continuously transports the waste to a dump site located outside the processing plant site. The crawler loader is used to spread the waste at the dump site.

3) Fire Protection Equipment. This equipment consists of sprinklers and salt water diesel fire pumps which are used at chip and lumber storage piles to protect the raw material inventory from fire.

4) *****************. This consists of a free-standing electric conversion "box" attached to above ground conduits running from the box to the production lines. The box receives power from a turbine and channels this power to the various production facilities.

5) *************. This facility consists of a freestanding electrical substation with conduits running from the substation to the tugboat dock. The facility provides a source of shore power for repairing ***********electrical tugboats. These tugboats are used in product/raw material transport between *********** in Virginia, Maryland, and North Carolina.

6) Crane. This crane is used in a variety of functions, principally general maintenance and repair. cannot determine what portion of the crane's usage is for general maintenance and repair, but concedes that these activities constitute the bulk of the crane's usage.

7) Coal Thawing Burners. These burners are located beneath railroad tracks at**********plant site. Rail cars, carrying coal used to power production equipment, are positioned above these burners which either thaw the coal or prevent it from freezing.

Determination

The exemption of tangible personal property purchased by an industrial manufacturer/processor (Virginia Code § 58-441.6) turns upon the satisfaction of two tests. First, the property must be used within the statutory limits of the manufacturing exemption set forth in Virginia Code § 58-441.3(p) as including:

- the production line of the plant starting with the handling and storage of raw materials at the plant site and continuing through the last step of production where the product is finished or completed for sale and conveyed to a warehouse at the production site, and also...equipment and supplies used for production line testing and quality control. (Emphasis added.)

Tangible personal property which is used outside the beginning and ending points of manufacturing will not qualify for exemption.

Second, the property must be used directly in manufacturing. The term "used directly" is defined by Code § 58-441.3(q) as:

- those activities which are an integral part of the production or product, including all steps of an integrated manufacturing process, but not including ancillary activities such as general maintenance or administration.

The concept of an integrated manufacturing or processing exemption includes within the scope of the exemption tangible personal property used directly to manufacture or process fuel, power, machinery or other property which is used in the industrial manufacturing or processing operation. In essence, this is an exemption for sub-processing activities which involve tangible personal property used directly in the main manufacturing or processing activity. Such sub-processing activities are also subject to the limitations with respect to the beginning and ending points of manufacturing or processing and the used directly concept.

Any tangible personal property which does not meet both of these tests will not qualify for a sales and use tax exemption. The fact that a particular item may be essential to a manufacturer's operation or the fact that an item may be required by state or federal law is not sufficient on its own to qualify an item for exemption.

In the instant case, waste containers, fire protection equipment and the crane which may be necessary items for the manufacturing process are not used directly in such process. Instead, the primary function of these items is in the general maintenance of the plant and the raw materials. Therefore, I find no basis for granting relief from tax assessed on these items. I similarly find no basis for exempting the crawler-loader which is used at a point outside the plant site and would be taxable even if such loader met the direct use test, which it does not.

I do, however, find a basis for relief from the use tax liability on the woodyard power conversion and tugboat shore power facilities. The woodyard power conversion system is a component part of the production of the power for production line equipment. Within the framework of the integrated exemption, this property is not subject to the tax.

The tugboat shore power facilities are used in the repair of tugboats which are engaged in interstate commerce. The fact that this commerce is between points which are a part of ******** own operation does not abrogate the exemption. (See Pipe Line Cases, 234 US 548, 58L ed 1459, 34 S Ct 956 and Barker v. Kansas C., M. & O. R. Co., 88 Kan 767, 129 P 1151 as cited in 15A Am Jur 2d, Commerce, 398 f.) Therefore, this facility is exempt from the tax under the provisions of Virginia Code § 58-441.6(i) pertaining to ships and vessels used in interstate commerce.

Further, I have determined that the coal thawing burners in question are not subject to the use tax. The integrated manufacturing exemption also extends to the manufacture or processing of fuel or power used in the manufacturing process, and such sub-processing begins with the handling and storage of the raw material at the plant site. The coal is used to produce the production line power and is thus the raw material for the sub-process of power production. Therefore, tangible personal property used in handling and storing this coal is exempt from the tax.

The final point of contest, culverts and stone, is controlled by the provisions of Virginia Code § 58-838.21(b) which exempts:

- machinery or tools and repair parts therefore used directly in the harvesting of forest products for sale of for use as a component part of a product to be sold. (Emphasis added.)

Once again, the term "used directly" is significant in narrowing the scope of the exemption. While culverts and stone may be necessary to provide access to the product to be harvested, they cannot be exempted from the tax since, at the time of their use, the harvesting has not yet begun.

The audit will be revised to reflect my determination with respect to the power systems and coal burners. However, the application of interest to tax deficiencies is mandatory under the provisions of Virginia Code § 58-1160, and I find no basis for relief from interest on any portion of this audit.

Sincerely,

W. H. Forst
State Tax Commissioner

Rulings of the Tax Commissioner