87-276 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Public utility; Protective articles; Weed control items

Topic

Exemptions

Taxability of Persons and Transactions

Date Issued

12-23-1987

December 23, 1987

Re: §58.1-1821 Application/Sales and Use Tax

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

This will reply to your letter of October 15, 1987, in which you submit an application for correction of sales and use tax assessed to ************** as the result of a recent audit.

FACTS

**************** ("Utility") is a public service corporation subject to a state franchise or license tax based upon gross receipts, which provides electrical service to subscribers. A recent audit of the utility produced an assessment for its failure to remit the sales and use tax on various purchases of tangible personal property.

The utility contests certain of: the purchases included in the audit, including purchases of load management switches, as well as other articles of tangible personal property which it feels are used directly in the rendition of its public utility service.

DETERMINATION

§58.1-608.10 of the Code of Virginia provides an exemption from the sales and use tax for:

- Tangible personal property sold or leased to a public service corporation subject to a state franchise or license tax upon gross receipts, for use or consumption by such corporation directly in the rendition of its public service . . .

The above statute clearly states that tangible personal property must be used directly in the rendition of a utility's public service in order to gain the exemption. Interpreting the statute, Virginia Regulation 630-10-87 provides:

- Items of tangible personal property that are used directly in the rendition of a public utility service are those which are both indispensable to the actual provision of a utility service and used or consumed immediately in the performance of such service. The fact that a particular item may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in the rendition of a public utility service. Emphasis added

Based on these principles, I will set forth below the application of the tax to the items contested by the utility.

Load Management Switches

These articles permit the utility to switch off a customer's hot water heater during periods of peak electrical demand, thereby allowing the customer savings on the cost of his electrical service. The utility installs the load management switch in the customer's home. These switches are classified under account number 399 of the Uniform System of Accounts for electrical utilities; articles charged to this account are deemed to be taxable under VR 630-10-86.

Inasmuch as these articles touch directly on the provision and delivery of electrical service by the utility by regulating the amount of electricity used by customers, I find basis for exemption. The utility may deem load management switches charged to account number 399 to be nontaxable; however, the tax should be remitted on all other articles charged to the account.

Staking Sheets and Transit Books

These articles are used by utility personnel in order to develop work orders for the construction of distribution lines and service electrical facilities, an administrative function. As the articles are used prior to the exempt production or distribution processes, rather than as a direct part of the processes, the exemption does not apply.

Line Guards, Testing Blankets, Line Hose, Insulator Hoods, and
Rubber Goods Connectors

The utility states that these articles are used to cover conductors while repair or other work is performed. These articles are directly analogous to methanometers and first aid equipment provided to coal miners; such equipment was deemed nontaxable by the Virginia Supreme Court in Commonwealth v. Wellmore Coal, 228 Va. 149, 320 S.E.2d 509 (1984). Therefore, to the extent that these articles are used directly in repairing distribution lines or to permit employees to safely maintain or make repairs to such lines, the exemption applies. The tax will apply to all other articles of tangible personal property charged to electric utility account number 925.1, however.

Engineering Stakes and Ribbon

These articles are used in the staking and marking of locations where electrical poles will be placed. As with staking sheets and transit books, this is a taxable administrative activity preparatory to the production or distribution of electricity to the public. As such, the exemption does not apply.

Protective Hooks and Glove Protectors

These articles are protective articles furnished to employees to enable them to safely perform maintenance and repair duties on electrical power lines. As such, these are not subject to the tax.

Weed Control

Although weed control may be necessary for the safe operation of certain of the utility's facilities, articles used in weed control are not essential to nor do they touch directly on the rendition of the utility's service. As such, the tax applies to these articles.

Gravel

As with articles used in the control of weeds, gravel is not essential to the rendition of service nor does it touch directly on the delivery of the utility's service. Further, VR 630-10-87 specifically states that the exemption does not apply solely because the use of an item may be required by law or practical necessity. Accordingly, I find no basis for relief of the tax assessed on purchases of gravel.

Specification Manuals and Standards

These items are used to keep employees educated on current rules, regulations, and procedures within the electric industry. I find this to be a purely administrative function; as such, the tax applies to these items.

Temperature Monitor

This item is installed at electrical substations to record weather and temperature information for purposes of protecting substation equipment and electrical load control. Based upon this description, the monitor appears to provide information for decision making purposes, a taxable administrative or managerial function.

Meter Stands

Virginia Regulation 630-10-63.C.2 on manufacturing and processing provides that the tax applies to:

- materials and apparatus used to support exempt production machinery, including flooring, concrete and metal platforms, etc., except supports or legs which are a component part of exempt production machinery and do not become affixed to real estate.

While this regulation does not have direct application to public utilities, the footnotes to the electric utility accounts contained in VR 630-10-87 similarly provide that the tax applies to foundations, settings, and steelwork. As such, the principles set forth in VR 630-10-63.C.2 would be applicable in this instance.

If the department's auditor determines that the stands in question are in fact a component part of exempt utility machinery and are not affixed to realty, they will be removed from the department's audit.

Pad Mounted Transformer

The transformer in question was purchased for direct use in the rendition of the utility's public service; however, it was placed into usage to serve the utility's headquarters garage. §58.1-623.D of the Code of Virginia provides:

- If a taxpayer gives a certificate (of exemption)...makes any use of the property other than an exempt use...such use shall be deemed a taxable sale by the taxpayer as of the time the property... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale.

Under the above statute, when a taxpayer makes any nonexempt use of property purchased or produced under a certificate of exemption, he becomes liable for the tax on such property. Inasmuch as the transformer in question is not used in the distribution of electricity to the public, I must conclude that the utility made a taxable use of the transformer when it was placed into service to serve the utility's garage facility.

The department's audit will be revised in light of the determinations reached herein. If you have any questions, please do not hesitate to contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner