Tax Type
Retail Sales and Use Tax
Description
Scrap metal yard; Cutting equipment
Topic
Taxability of Persons and Transactions
Date Issued
07-06-1988
July 6, 1988
Re: §58.1-1821 Application/Sales and Use Tax
Dear******************
This will reply to your letter of April 8, 1988, seeking the correction of an assessment issued in the above referenced case for the period November 1, 1981, through September 30, 1987.
FACTS
********** ("The Taxpayer"), operates a scrap metal yard in the Commonwealth. Its main source of metal are old railroad cars and rails. The old cars are transported to the Taxpayer's plant and are cut up into pieces using a burning torch and other cutting devices. The processing transforms the unused rail cars into conformed shapes of dimensions according to published industrial specifications. This process also involves the elimination of impurities (using magnets and other cleansing processes).
The Taxpayer protests the assessment of tax on the equipment used at the plant. The Taxpayer also contests the audit sample used in the audit and the period of limitations applied to the audit.
DETERMINATION
§58.1-608(1)(c) of the Code of Virginia exempts from retail sales and use tax "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy or supplies used directly in processing...or conversion of products for sale or resale."
§630-10-63(A)(7) of the Virginia Retail Sales and Use Tax Regulations states in pertinent part that "for a business to obtain the exemption, it first must be...processing products for sale or resale and secondly, such production must be industrial in nature. The determination of whether an operation is industrial in nature shall not be made without regard to plant size, finished product size...or other factors relating principally to size."
§630-10-63(B)(1) of the Retail Sales and Use Tax Regulations which mirrors Va. Code §58.1-602(9), defines processing as "the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable."
From the facts provided by the Taxpayer, I find that the type of activity conducted is "processing" and will qualify for exemption from the tax. The burning and cutting of the rail cars for use at steel mills make the product more useful and marketable. Also, the operation at the plant site is industrial in nature.
§58.1-634 of the Virginia Code states that sales and use taxes "shall be assessed within three years from the date on which such taxes became due and payable...[however for] failure to file a return, the taxes may be assessed...at any time within six years from such date." Since the Taxpayer filed some use tax returns with the Commonwealth during the audit period, the six year period of limitations is not applicable. The audit will be adjusted to reflect a three year period of limitations.
Sampling is an audit technique of significant value and is widely used in all types of audits where a detailed 100% audit would not prove beneficial to either the auditor or the Taxpayer. The Taxpayer contests the method used by the auditor.
The auditor used a two month sample audit period based on the Taxpayer's accounts. The Taxpayer wanted the auditor to base the audit using only three of the ten accounts. If the Taxpayer's method had been used, the measure or base would have been diluted (not an accurate reflection of Taxpayer's total business) and the error factor would have been higher.
Using the Department's method, there is a lower error factor and the ten accounts reflect the Taxpayer's total business. The three account method only is reflective of those three accounts and does not reflect the Taxpayer's total business.
The techniques in this case were properly applied; there was a narrow range of error resulting in accuracy and fairness to the Taxpayer. The courts have held that a tax assessment by the proper assessing authorities is prima facie correct and the burden is upon the Taxpayer to prove that the assessment is incorrect. The Taxpayer has not met this burden.
The audit will be adjusted accordingly and we will issue a revised Notice of Assessment to the Taxpayer.
If you have any further questions, please do not hesitate to contact the Department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner