91-143 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Vessels, Interstate Commerce; Berthing Facilities

Topic

Taxability of Persons and Transactions

Date Issued

07-31-1991

July 31, 1991

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

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

This will respond to your letter of May 16, 1991 in which you seek correction of an assessment to your client,************** (the "Taxpayer"), for the period June 1987 through December 1989.

FACTS

The Taxpayer is engaged in ship repair/shop fabrication activities. It is specifically contesting the application of sales tax to berthing facilities (lodging acquired form local hotels) furnished to one of its customer's personnel during the period the vessel was undergoing repair. The Taxpayer maintains that the contested assessment should be abated because:

- (1) the temporary lodgings and related services are exempt as property used in the repair of ships under Va. Code 58.1-608(3)(d);
  (2) in the alternative, the costs of berthing facilities are directly related to the repair of ships and therefore are exempt under the above Code section;
  (3) even if the cost of the berthing facilities is not exempt, the error factor developed by the auditor is overstated; and
  (4) the penalty is not appropriate.

DETERMINATION

I will address each of the above issues separately below, except for issues 1 and 2, which will be addressed together.

(1) & (2) Temporary lodgings (berthing facilities): Va. Code
§ 58.1-608(3)(d) provides, in pertinent part, an exemption for:

- [s]hips or vessels used or to be used exclusively or principally in interstate or foreign commerce, or repairs and alterations thereof;...tangible personal property used directly in the building, conversion or repair of the ships or vessels covered by this subdivision.

In interpreting this exemption, Virginia Regulation (VR) 630-10-98 provides that:

- [t]he tax does not apply to ships or vessels used or to be used exclusively or principally in interstate or foreign commerce or to repairs and alterations of them...The tax does not apply to tangible personal property used directly in the building, conversion or repair of such ships or vessels. (Emphasis added)

The first part of the exemption serves to exempt the purchase of repairs and alterations by the owners and operators of the ships or vessels whereas the last part of the exemption exempts tangible personal property by the owners and operators or by others engaged in the shipbuilding or repair businesses. To qualify for the exemption, tangible personal property purchased must be used directly in the building, conversion or repair of a ship or vessel used exclusively or principally in interstate or foreign commerce or plying the high seas. The term "used directly" refers to items that are "indispensable" to the actual production or repair activity and which are used as an "immediate" part of such process. See VR 630-10-63(B)(2) and Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).

While the removal of personnel may be necessary in order to repair the vessel, it is not indispensable to the actual repair of the ships and clearly does not touch on the actual repair process. Furthermore, the above exemption is limited to tangible personal property and hotel accommodations are a service. Accordingly, the berthing of crewmen would not qualify for the above exemption.

(3) Error Factor: The Taxpayer contests the validity of the sampling process used in the audit since the berthing costs were actually incurred only in one year and the auditor extrapolated the expenses over the entire three-year audit period as if they occurred evenly through the period. It contends that it is inappropriate to use the berthing expenses in any type of sampling and that they should only have to pay use tax on the aggregate amount of non-taxed berthing expenses actually determined during the audit.

At the time of the audit the Taxpayer agreed to the sample period. Subsequent to the assessment, the department's offer to restructure any audit deficiency through a detailed review of all applicable berthing charges for the entire audit period was rejected. Thus, I find no basis for revising the error factor.

However, I will iterate the department's original offer to restructure the audit deficiency.

(4) Penalties: Based on the information provided, under the provisions of Va. Code § 58.1-105. I will abate the penalties assessed.

Accordingly, the audit will be revised in accordance with the determination reached in this letter and a revised Notice of Assessment will be sent to the Taxpayer as soon as practicable. Should the Taxpayer desire to accept the department's offer to restructure the audit deficiency as explained above, it should contact our ************** District office within 30 days.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner