Tax Type
Retail Sales and Use Tax
Description
Tour of Coal Plant before audit
Topic
Appropriateness of Audit Methodology
Basis of Tax
Taxpayers' Remedies
Date Issued
12-14-1982
December 14, 1982
Re: Request for Ruling: Sales and Use Tax
Dear *********************
This will reply to your letter of March 31, 1982 and the meetings with representatives of this department in reference to a request for a ruling on the application of the sales and use tax to the coal processing facility constructed by ******************.
FACTS
*********** is constructing a coal processing and export facility in the ******************** area. This facility will process coal owned by ***************** as well as other companies.
Briefly, the process begins with the arrival of coal-filled railroad cars at the terminal site. Upon entering the site, the cars are conveyed by 2 locomotive owned by *************. The coal is dumped by the rail carload into a dumper vault, which is essentially a large underground concrete box containing hoppers and conveyor machinery. The coal is conveyed from the dumper vault via a belt conveyor to various "lay down areas" (large piles of coal) which are segregated by coal grade. When an order is received, various grades of coal are blended to form the grade Or blend specified by the customer. Coal, in the amounts necessary to achieve the desired blend, is released from the graded piles via a trap-door mechanism onto an underground conveyor system called a draw tunnel. The blending of the product continues on the conveyor system which conveys the coal onto the pier and into the ship
for loading.
In your March 31, 1982 letter, you request sales and use tax rulings as follows:
1. That activities of ********at the************** site be classified as industrial processing;
2. That the production line of the plant be deemed to begin at the railroad track in the facility include the dumper vault and continue through the loadout boom where the coal is loaded onto waiting ships, and
3. That **************will be liable for tax on the cost price of nonexempt materials purchased by them or by************** the construction manager, On their behalf.
Additionally, in the meeting of October 6, 1982, you requested a ruling on the tax application to the following items:
1. Computer hardware and software used in the "control" of the production line;
2. Supports for the pier On which a portion of the conveyor system and loadout boom (used to load coal onto ships) are located, and repair work to said pier;
3. Settling pond for production waste disposal.
4. Control tower containing panels for production line control; .
5. Paving materials used-in lay down areas to create barrier between the soil and the coal; and
6. Rail tracks located within plant site.
RULING
§ 58-441.6 of the Code of Virginia provides an exemption from the sales and use tax for raw materials, machinery and tools and repair parts therefor, fuel, power, energy, and supplies used directly in the industrial manufacture or processing of property for sale or resale. Virginia Code § 58-441.3(p) defines the parameters of the terms "manufacturing" and.."processing" and § 58-441.3(q) defines the term "used directly' as it applies to the manufacturing and processing exemption. These three sections of the law and other interpretation by the courts control this ruling.
The Virginia Supreme Court, in Commonwealth v. Orange-Madison Coop. Farm Serv., 220 VA. 655, 261 S.E. 2d 532 (1980), defined "processing," as the term is used in § 58-441.6, as requiring that a "product undergo a treatment rendering the product more marketable Or useful." We agree that is processing a product for sale/resale; thus, the first test of the exemption has been satisfied. Secondly, the exemption requires that such processing be industrial in nature. The plant size, amount Of capital investment and mechanized assembly line process indicate that this facility is industrial. Therefore, the exemption under § 58-441.6 will be applicable to this plant.
Virginia Code § 58-441.3(p) defines manufacturing as beginning 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. ..
Based upon this statutory definition, the limits of the exemption at the ************ site will begin at the point that ***********privately owned railroad tracks start and ****** locomotive assumes control of the rail cars. processing will be deemed to have ended at the point that the finished product is conveyed to the loadout boom for loading onto ships. Within these parameters, tangible personal property which is "used directly" in the processing will qualify for the exemption.
- 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. ..
The term "used directly" is defined in § 58-441.3(p) and has been addressed by the Supreme Court as well. Perhaps the single key determination of "used directly," that an item must be an immediate part Of actual production, was set forth by the Virginia Supreme Court in Webster Brick Co. v. Department of Taxation, 219 VA. 81, 245 S.E. 2d 252 (1978) in which the court held that "essential items which are not an immediate part of actual production are not exempt." With these basic tenets in mind, we will address each item in question.
Dumper Vault
The dumper vault itself consists of structural steel and concrete and contains a hopper and conveyor machinery used to move the raw coal onto the next step of production. While we concur that the hopper and conveyor located within the vault are machinery and tools used directly in processing, we cannot hold that the materials comprising the concrete vault itself are used directly in the process. Instead, this box serves as an enclosure for the machinery and is therefore one step removed from direct use in production. The exemption, subject to the role of strict construction, extends only to machinery, tools, fuel, power, energy, and supplies. We cannot hold that the vault or its protective covering constitute machinery and tools used directly in processing, nor can they be classified as fuel,..power, etc., therefore, materials used in the construction of these two items are subject to the tax.
Railroad Tracks
The tracks located on the plant site serve as the foundation for the rail cars which convey the coal throughout the plant. While we concede that the rail cars themselves are used directly in the production process, we cannot agree that the tracks on which they move are similarly used directly in processing.
Underground Draw Tunnels
The underground draw tunnels which consist of corrugated steel tubing, a concrete base on which rests a conveyor system, and sump pumps for drainage, are located beneath the lay-down areas and serve as the mechanism for conveying the coal from the lay-down piles to the testing and loading facilities. Blending occurs throughout-this conveyance process. The conveyor system within the tunnels constitutes a part of the processing production line and is therefore classified as machinery and tools used directly in processing. Similarly, the sump pumps which control the level of moisture within these tunnels are an immediate part of production line quality control and are therefore used directly in the processing.. The concrete foundation and the steel tubing surrounding the conveyor itself are not machinery and tools used directly in the coal processing operation. Instead, these items, much like the floors and walls of a building, serve to protect and support the conveyor system...This is analogous to the manufacturing plant in which the walls, floor, and roof are essential to the process inasmuch as they support and protect manufacturing machinery, but are not an immediate part of the process and do not, therefore, qualify for exemption.
Conveyor System
The conveyor system consists of a conveyor belt mounted on steel less which are then set in corrugated steel "sleeves" which have been driven into the ground to prevent shifting in the event of soil settlement. The conveyor system and the steel legs upon which it sits constitute machinery and tools used directly in processing which are not subject to the tax. The steel sleeves function as the foundation/support for the conveyor system . Again, while these sleeves may be essential to the process, they do not constitute an immediate part of the production, and are not within the scope of the exemption.
Computer Hardware and Software
The hardware and software in question constitute a system for inventory control, blending specification determination, and conveyor system control. To the extent that the computer system is used to direct the operation of the production line by controlling its starting and stopping and to determine the blend specifications for coal to be processed, the system will be deemed to be used directly in processing and hence will not be subject to the tax.' However, the control of incoming inventory, power control and similar functions are deemed to be for administrative purposes, and to the extent that the computer system is used in these activities, it will be subject to the tax. Therefore, if the software and hardware are used in both taxable and exempt fashions, the exemption will be prorated between the taxable and exempt usage.
Control Tower
The control tower contains the equipment which actually operates the production line as well as working space for One operator. The actual control machinery which directs the operation of all aspects of the production line does constitute machinery used directly in the processing operation and will therefore not be subject to the tax. However, the tower structure itself constitutes a shelter for the machinery and while it may be essential to the process, it is not an immediate part thereof. Likewise, operator chairs, tables, or other items which may be placed in the tower for operator comfort or convenience are used indirectly in processing and are therefore subject to the tax.
Paving Materials in Lay Down Areas
Within the coal lay down area, several piles of differing grades of coal will be stacked. To avoid contact with the soil/sand surface, each area is paved with a special compound. You contend that such paving materials are an integral part of the handling and storage Of the coal and are alternatively a production line quality control function since they prevent soil contamination of the coal. We reject this contention and hold instead that these paving materials create a floor on which the coal sits much like the floor in a factory. Therefore, the materials which go into these areas will be subject to the tax.
Pier Supports and Repairs
The end of the conveyor system and the loadout boom which loads coal onto ships are located on an existing pier which may require additional supports and periodic repair work. The pier, in the same manner as the conveyor sleeves and underground supports, functions as the foundation for a portion of the processing production line, but is not itself an immediate part of production. Therefore, we find no basis for exempting items used in the construction, repair, or maintenance of the pier.
Waste Settling Pond
The pond is used to trap and separate the waste by products of the blending process. Inasmuch as production has ended at the point that waste treatment begins, no exemption is available for items used in this process under the provisions of §58-441.6. However, Virginia Code §58-16.3 does exempt from the tax property classified as "certified pollution control equipment and facilities" (emphasis added). In order to qualify for this exemption, certification of the project's pollution control status must be obtained for the State Air Pollution Control Board or Water Pollution Control Board, whichever is applicable. Once certification has been obtained, which should specify the exact nature of the project, exemption is available through application to this department.
Tax Liability
It is our understanding that ******** is not assuming the tax liability of its contractor or subcontractors.... Instead, ***** and ****** have been either paying the tax to suppliers on purchases or remitting the tax directly to the department via consumer's use tax returns. Should this ruling result in a claim for refund, such claim will be made by the entity which originally paid or remitted the tax. It should be noted that any claim for refund must be received. Within three years from the date the tax was due.
SUMMARY
In summary, we hold that the ******* facility in ***** is engaged in processing in the industrial sense and that the scope of the exemption is from the arrival of rail cars at **** private tracks and handling Of such cars by ********** locomotive to the conveyance of the processed coal to the loadout boom. Specifically, we hold that the machinery and steel legs comprising the conveyor system, the hopper and conveyance mechanism within the dumper vault, the machinery comprising the conveyor belt and sump pumps within the underground draw tunnels, the panel and machinery used to control the production line, and to a limited degree, the computer software and hardware used in the production line control are used directly in the processing operation and are not subject to the tax. We further rule that the concrete and structural materials comprising the dumper vault and covering, railroad tracks, steel tubing and concrete surrounding the underground draw tunnel conveyor system, the steel sleeves supporting the conveyor system, structural materials and administrative items contained in the control tower, materials comprising paved portions of the lay-down areas, property used in pier construction and repair, and, to a limited degree, computer hardware and software are not used directly in the processing operation and are therefore subject to the tax.
Pursuant to your October 6 meeting with representatives of this department, we agree that prior to conducting an audit of this project, we will tour the completed facility to affirm the application of this ruling to the specific aspects of the ***************** operation.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner