Tax Type
Retail Sales and Use Tax
Description
Sand and gravel mining by highway contractor
Topic
Taxability of Persons and Transactions
Date Issued
07-01-1985
July 1, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will refer to your letter of December 27, 1983 and your meeting of July 18, 1984 with representatives of the department's Tax Policy Division in which you submit an application for correction of sales and use tax assessed to ******** as the result of audits.
FACTS
**** (hereinafter ****) engaged in the surface mining of sand, gravel, and other materials for sale to others and for use in its own asphalt plant and highway construction operations.
**** has remitted the use tax on such mined materials used in its operations based upon the cost of the materials themselves, i.e. a fifty cent per ton royalty charge. An audit of **** produced an assessment for the failure to compute the use tax on such materials based upon their fabricated cost price. **** requests relief from this assessment contending that its original tax computation was correct under the provisions of Virginia Retail Sales and Use Tax Regulations 1-27. 1-27.1. and 1-63.
DETERMINATION
During the audit period in question, Section 58-441.5 of the Code of Virginia (recodified as Virginia Code Section 58.1-6O4 effective January 1, 1985) imposed "a tax upon the use or consumption of tangible personal property," such tax being based upon the "cost price of each item or article of tangible personal property used or consumed." Virginia Code Section 58-441.3(c) (now Virginia Code Section 58.1-6O2.2) in turn defined the term "cost price" as "the actual cost of an item or article of tangible personal property," computed in the same manner as "sales price" in Virginia Code Section 58-441.3(b) (now Virginia Code Section 58.1-602.17), "without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever." (Emphasis added.)
In the instant case, **** is the user or consumer of sand, gravel, and other materials mined by the company for use in its asphalt plant and highway construction operations. Accordingly, the computation of use tax on the materials used in those operations should be based upon their actual cost price.
Inasmuch as mining operations such as **** enjoy the same industrial production exemptions as manufacturers, sales and use taxes applicable to miners and manufacturers are administered in a substantially identical manner. In determining the basis of the use tax when items are withdrawn from a manufacturer's inventory, the department has traditionally drawn a distinction between persons who primarily produce items for sale or resale and those who produce items primarily for their own use in real estate construction contracts. Accordingly, the same distinction should be drawn between persons who mine products for sale or resale primarily and those who mine items for their own use in real property construction contracts.
The department, through Section 1-27 (now Section 63O-10-27) of the Virginia Retail Sales and Use Tax Regulations, has held that those persons who fabricate items for their own use in real estate construction must remit the use tax based upon the raw material cost of the fabricated items. This position presumes that the actual cost to such manufacturers would not include labor and other normal production costs since the manufacturer also becomes the consumer of such items.
On the other hand, Virginia Retail Sales and Use Tax Regulation 1-27 also stated that any person who produces items primarily for sale or resale and who withdraws any such items for use in his own real property construction contracts is liable for the use tax based upon the fabricated cost price of the tangible personal property withdrawn from inventory. This position presumes that the actual cost to such fabricators is inclusive of labor and other overhead costs since the items withdrawn from inventory were originally intended for sale at prices inclusive of labor and other overhead charges.
Based upon the comments of the department's auditor, 63 percent of the minerals mined by were sold to others; consequently, any use tax incurred by **** on items withdrawn from inventory should be based upon the fabricated cost price of the items. Therefore, should have remitted the use tax based upon a rate inclusive of overhead charges as well as the fifty cent per ton royalty fee charged to by the owners of its mining sites.
It should be noted here that Section 63O-10-27 of the Virginia Retail Sales and Use Tax Regulations published January l, 1985 relates specifically to manufacturers, processors and miners who produce or extract materials for sale or resale and for their own use. A copy of the regulation is enclosed.
While I find the provisions of former Regulation 1-27 to have been applicable to miners, I find some basis for revising the assessments issued to ****.
First, the provisions of former Regulation 1-27 relating to the valuation of tangible personal property withdrawn from resale inventory must be read in light of the entire regulation. Subsection (b) of the regulation provides that a person fabricating both for his own use or consumption and for sale or resale "may not purchase under a resale certificate any tangible personal property which he knows at the time of purchase will be furnished by him, as a using or consuming contractor, in connection with any specific contract." Accordingly, if an inventory of mined materials is not maintained at a mine site and **** only mines materials as needed for sale or its own use, the tax is only due on the raw material cost of materials used by ****. If advised by that an inventory of mined materials was not maintained at one of its three mine sites, the audit of that site will be revised to delete the tax assessed.
Appropriate revisions would also include the abatement of tax if the majority of materials mined at a site were used by **** rather than resold. In addition, I would be willing to analyze any alternative computations of fabricated cost price computed by **** for its different mine sites. The assessments will be revised if such computations are verified and produce an average overhead cost lower than the fifty cent per ton figure applied in our audits.
I will entertain the submission of the information described above and any other information you feel to be appropriate within the next sixty days.
Sincerely,
W. H. Forst
Tax Commissioner
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will refer to your letter of December 27, 1983 and your meeting of July 18, 1984 with representatives of the department's Tax Policy Division in which you submit an application for correction of sales and use tax assessed to ******** as the result of audits.
FACTS
**** (hereinafter ****) engaged in the surface mining of sand, gravel, and other materials for sale to others and for use in its own asphalt plant and highway construction operations.
**** has remitted the use tax on such mined materials used in its operations based upon the cost of the materials themselves, i.e. a fifty cent per ton royalty charge. An audit of **** produced an assessment for the failure to compute the use tax on such materials based upon their fabricated cost price. **** requests relief from this assessment contending that its original tax computation was correct under the provisions of Virginia Retail Sales and Use Tax Regulations 1-27. 1-27.1. and 1-63.
DETERMINATION
During the audit period in question, Section 58-441.5 of the Code of Virginia (recodified as Virginia Code Section 58.1-6O4 effective January 1, 1985) imposed "a tax upon the use or consumption of tangible personal property," such tax being based upon the "cost price of each item or article of tangible personal property used or consumed." Virginia Code Section 58-441.3(c) (now Virginia Code Section 58.1-6O2.2) in turn defined the term "cost price" as "the actual cost of an item or article of tangible personal property," computed in the same manner as "sales price" in Virginia Code Section 58-441.3(b) (now Virginia Code Section 58.1-602.17), "without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever." (Emphasis added.)
In the instant case, **** is the user or consumer of sand, gravel, and other materials mined by the company for use in its asphalt plant and highway construction operations. Accordingly, the computation of use tax on the materials used in those operations should be based upon their actual cost price.
Inasmuch as mining operations such as **** enjoy the same industrial production exemptions as manufacturers, sales and use taxes applicable to miners and manufacturers are administered in a substantially identical manner. In determining the basis of the use tax when items are withdrawn from a manufacturer's inventory, the department has traditionally drawn a distinction between persons who primarily produce items for sale or resale and those who produce items primarily for their own use in real estate construction contracts. Accordingly, the same distinction should be drawn between persons who mine products for sale or resale primarily and those who mine items for their own use in real property construction contracts.
The department, through Section 1-27 (now Section 63O-10-27) of the Virginia Retail Sales and Use Tax Regulations, has held that those persons who fabricate items for their own use in real estate construction must remit the use tax based upon the raw material cost of the fabricated items. This position presumes that the actual cost to such manufacturers would not include labor and other normal production costs since the manufacturer also becomes the consumer of such items.
On the other hand, Virginia Retail Sales and Use Tax Regulation 1-27 also stated that any person who produces items primarily for sale or resale and who withdraws any such items for use in his own real property construction contracts is liable for the use tax based upon the fabricated cost price of the tangible personal property withdrawn from inventory. This position presumes that the actual cost to such fabricators is inclusive of labor and other overhead costs since the items withdrawn from inventory were originally intended for sale at prices inclusive of labor and other overhead charges.
Based upon the comments of the department's auditor, 63 percent of the minerals mined by were sold to others; consequently, any use tax incurred by **** on items withdrawn from inventory should be based upon the fabricated cost price of the items. Therefore, should have remitted the use tax based upon a rate inclusive of overhead charges as well as the fifty cent per ton royalty fee charged to by the owners of its mining sites.
It should be noted here that Section 63O-10-27 of the Virginia Retail Sales and Use Tax Regulations published January l, 1985 relates specifically to manufacturers, processors and miners who produce or extract materials for sale or resale and for their own use. A copy of the regulation is enclosed.
While I find the provisions of former Regulation 1-27 to have been applicable to miners, I find some basis for revising the assessments issued to ****.
First, the provisions of former Regulation 1-27 relating to the valuation of tangible personal property withdrawn from resale inventory must be read in light of the entire regulation. Subsection (b) of the regulation provides that a person fabricating both for his own use or consumption and for sale or resale "may not purchase under a resale certificate any tangible personal property which he knows at the time of purchase will be furnished by him, as a using or consuming contractor, in connection with any specific contract." Accordingly, if an inventory of mined materials is not maintained at a mine site and **** only mines materials as needed for sale or its own use, the tax is only due on the raw material cost of materials used by ****. If advised by that an inventory of mined materials was not maintained at one of its three mine sites, the audit of that site will be revised to delete the tax assessed.
Appropriate revisions would also include the abatement of tax if the majority of materials mined at a site were used by **** rather than resold. In addition, I would be willing to analyze any alternative computations of fabricated cost price computed by **** for its different mine sites. The assessments will be revised if such computations are verified and produce an average overhead cost lower than the fifty cent per ton figure applied in our audits.
I will entertain the submission of the information described above and any other information you feel to be appropriate within the next sixty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner