90-14 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Steel fabricator; Barge launchway supports and foundation

Topic

Exemptions

Property Subject to Tax

Date Issued

01-11-1990

January 11, 1990

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

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

This will reply to your letter of July 27, 1988 seeking correction of an assessment issued in the above referenced case for the period of April 1984 through February 1986.

Facts

***************("the Taxpayer") operates as a steel fabricator engaged in the construction and repair of barges. As a result of an audit by the department, the Taxpayer was held liable for failure to collect sales tax on the labor associated with the splicing or welding of certain steel beams and for failure to remit use tax on its purchases of concrete and steel used in the construction of supports and foundations for its new variable slope launchway.

The Taxpayer contests the assessment on the grounds that the splicing or welding of beams furnished by customers is a nontaxable service under §630-10-97.1 (B)(2) of the Virginia Retail Sales and Use Tax Regulations and that similar transactions were not included in prior audits by the department. The Taxpayer asserts that the supports and foundations are exempt as component parts of exempt production machinery under Virginia Retail Sales and Use Tax Regulations §630-10-63 and that the entire launchway system is assessed as tangible personal property for local property tax purposes. Additionally, the Taxpayer requests the department to confirm that the materials for certain jobs were not included in the audit assessment.

RULING

The department acknowledges that the Taxpayer correctly collected and remitted the tax on Jobs 406-11, 434-31 and 434-96, and that charges for materials used in those jobs were never included in the audit. Charges for the labor shown on invoices for those jobs were subsequently determined to represent exempt repair labor and removed from the audit by the department's auditor.

The remaining contested issues will be addressed separately below.

Splicing

Virginia Retail Sales and Use Tax Regulation §630-10-37, in accord with Virginia Code §58.1-603 (Imposition of sales tax) and the definitions of "sale at retail" and "sale" as set forth in Virginia Code §58.1-602, provides that:

- An operation which changes the form or state of tangible personal property is fabrication . . . A person regularly engaged in the fabrication of tangible personal property for sale must collect and pay the tax on the sales price of the property . . . The tax applies to the total charge for the fabrication of tangible personal property on a special order for a consideration, including labor, even if charges for labor are separately stated. The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work . . . (Emphasis added)

The department has traditionally held that tangible personal property which is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property's form or state is considered to have been "fabricated". Such operations are deemed to represent a taxable service in accordance with the above regulation, notwithstanding that the materials used in the work may have been furnished by the dealer's customer. For example, the Commissioner's ruling dated November 28, 1986, copy enclosed, determined that a taxpayer was performing a fabrication operation when it merely cut or shaped lumber brought in by its customer. The taxpayer in that case had also argued that it was performing an exempt service.

In the instant case, the Taxpayer's customer brings the Taxpayer two steel beams to be welded together to make one longer beam. The Taxpayer's elongation of a beam in this instance by the welding of another beam to it essentially produces a new or different item from the original, with different characteristics, i.e., a longer length. Applying the facts in this case to the statutes and regulation cited above, I find that the splicing or welding at issue here represents a change in the form or state of tangible personal property within the meaning of the regulation and therefore constitutes fabrication.

Notwithstanding the correctness of the department's assessment, due to the misunderstanding that evidently resulted from prior department audits concerning the taxation of labor when beams are welded, we will remove these charges from the audit and adjust the assessment accordingly. For the future, however, the Taxpayer will be expected to collect sales tax on all such fabrication labor.

Supports/Foundations

The Taxpayer purchased concrete and steel for the construction of supports and below ground foundations for a new launchway system. The launchways, utilized for the construction and repair of barges, allow for the raising and lowering of heavy tonnage barges in and out of the water.

The launchway consists of ten skidways. Each skidway consists of three major components: (1) An inshore box girder, which pivots at midpoint, allows the vessel to be built in a flat position and then tipped by a vertical hydraulic cylinder for launching; (2) An offshore fixed inclined track which guides the vessel into the water as it leaves the pivoting girder; and (3) A launch cradle which is a set of skids to support the vessel while it is under construction. Upon launching, the skids slide down the tilting girder onto the offshore inclined track and then into the water along with the vessel being launched. Each girder pivots on a pin and is raised by a hydraulic cylinder. The offshore track is a large beam with appropriate supports. Each track is supported on two foundations and each tilting girder requires three foundations. The supports and foundations provide the strength to hold parts of the equipment in place.

Machinery used directly in production as well as materials used to construct the girder, offshore track, and launch cradle were not included in the department's audit. However, the department's auditor did include construction materials such as concrete, concrete pilings and steel used to construct supports and foundations for the pivot and offshore track mechanisms, and an enclosure for the hydraulic lift mechanism.

§58.1-608(3)(b) of the Virginia Code provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing . . . products for sale or resale." (Emphasis added). §58.1-602 of the Code of Virginia defines the term "used directly" as "those activities which are an integral part of the production of a product." Expanding on this, Virginia Regulation 630-10-63 provides in part that:

- Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., or items which are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery. Furthermore, the fact that the use of a particular item, such as firefighting and safety equipment, may be required by federal, state or local law is not, by itself, dispositive of direct usage in manufacturing or processing.

This regulation further provides that "[s]teel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax. However, concrete floors or foundations on which such supports rest or to which machinery is bolted, and structures housing machinery are not used directly in manufacturing and processing and are subject to the tax."

Analyzing the instant facts in light of the above authorities, I find that the concrete supports and pilings used for support are not used directly in the manufacturing process and therefore were properly included in the department's audit.

The revisions noted above will be performed as soon as practicable and a revised notice of assessment will be issued to the Taxpayer.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner