Tax Type
Retail Sales and Use Tax
Description
Horse breeding and racing; Application of agricultural exemption
Topic
Exemptions
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
11-19-1991
November 19, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear******************
This will reply to your letter of September 18, 1989, as supplemented by your letter of December 14, 1990 and information presented during our meetings of June 5, 1990 and June 14, 1991, in which you contest sales and use tax assessments issued to your client,*************** (Taxpayer), as a result of an audit by the department.
Facts
The Taxpayer owns and operates a thoroughbred horse breeding farm in Virginia. It also owns or leases breeding or training facilities in***********. An audit of the Taxpayer for the period March 1, 1983 through February 28, 1989 produced assessments for its failure to remit the use tax on yearlings which were purchased in Kentucky and New York under an exemption from Kentucky and New York sales tax, brought back to the Taxpayer's Virginia facilities, and later shipped out of state for training and racing. The Taxpayer was also held liable for the tax on the supplies and feed for racehorses.
The Taxpayer contests the assessment, contending that the agricultural exemption applies to the Taxpayer's racing activities, the Taxpayer may prorate the use tax on the yearlings under Va. Code §58.1-604, and the auditor's computations of the percentage of taxable usage are inaccurate.
Determination
I will separately address below the issues raised by the Taxpayer:
Agricultural Exemption
The sales and use tax agricultural exemption is set forth in Va. Code §58.1-608(A)(2)(a). Virginia Regulation (VR) 630-10-4 interprets this statute. The Taxpayer asserts that the agricultural exemption as presently worded would apply to the purchase of horses by a farmer, regardless of whether such horses would be used in agricultural production for market.
VR 630-10-4 sets forth the proper interpretation of the statute and clearly provides that the exemption applies only to property purchased for use in agricultural production for market. The agricultural exemption provided by Va. Code §58.1-608(A)(2)(a) is inapplicable to purchases of horses for racing as such horses are not for use in agricultural production for market. The validity of the department's long-standing policy, expressed in VR 630-10-4, was upheld in an August 15, 1989 opinion of the Attorney General (copy enclosed).
Use Tax Proration
The Taxpayer purchased and took possession of yearlings in Kentucky and New York exempt from tax and brought them into Virginia in its van within three or four days after purchase. The yearlings, which were purchased for eventual racing outside of Virginia, remained in Virginia for several months and were then shipped out of state for training and racing. While the horses left Virginia after a stay of several months, they were frequently returned to this state for rest and rehabilitation from injury before returning to the racetrack. The Taxpayer contends that the use tax under Va. Code §58.1-604 must be prorated and has submitted records to the department which show the time of use of horses in Virginia.
Va Code §58.1-604 provides in part:
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- Tangible personal property which has been acquired for use outside this Commonwealth and subsequently becomes subject to the tax imposed hereunder shall be taxed on the basis of its cost price if such property is brought within this Commonwealth for use within six months of its acquisition; but if 90 brought within this Commonwealth six months or more after its acquisition, such property shall be taxed on the basis of the current market value (but not in excess of its cost price) of such property at the time of its first use within this Commonwealth. Such tax shall be based on such proportion of the cost price or current market value as the duration of time of use within this Commonwealth bears to the total useful life of such property (but it shall be presumed in all cases that such property will remain within this Commonwealth for the remainder of its useful life unless convincing evidence is provided to the contrary).
Va. Code §58.1-604 (also see VR 630-10-109.D) provides for proration of the use tax based on actual usage in Virginia under extremely limited circumstances, i.e., when "tangible personal property...has been acquired for use outside this Commonwealth and subsequently becomes subject to the (Virginia) tax." Based on the information before me, the horses in this case were not "acquired for use outside this Commonwealth," within the meaning of Va. Code §58.1-604.
Va. Code §58.1-604 imposes the use tax upon the "use or consumption of tangible personal property in this Commonwealth." "Use tax," under Va. Code §58.1-602, "refers to the tax imposed upon the use, consumption, distribution, and storage as herein defined." "Use" is then defined as "the exercise of any right or power over tangible personal property incident to the ownership thereof..." "Storage" is defined as "any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than for sale at retail in the regular course of business."
In this case, the Taxpayer's importation of its horses and storage of the horses in Virginia constitutes a taxable use of tangible personal property in the state, notwithstanding that the property will later be used outside of the state. This position is supported by the opinion of the Virginia Supreme Court in Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E. 2d 413 (1980), which held taxable the storage of tangible personal property in Virginia, even though the property would ultimately be shipped outside of the state. The tax liability was incurred by the Taxpayer at the moment the horses were brought into Virginia and stored for use by the Taxpayer.
It is evident that at the time the horses were purchased, the Taxpayer proposed to import and store the horses in Virginia. The horses were routinely transported into Virginia for storage at the taxpayer's Virginia facilities immediately upon purchase in the other states. I must conclude that the horses were acquired for future use (storage) in Virginia, notwithstanding that after storage in Virginia, the horses were to be used for racing outside of Virginia. As the horses were not acquired for use outside the state, within the meaning of Va. Code §58.1-604, a partial exemption is inapplicable.
It is the property not purchased "for use" in Virginia, but subsequently used in Virginia that is contemplated within the proration language. For example, proration may apply to construction equipment acquired outside of Virginia for the purpose of performing out of state construction contracts, rather than for any use in Virginia, and subsequently brought into the Commonwealth temporarily. However, proration would not apply to such equipment when at the time of the purchase, the purchaser proposed to store or otherwise use the equipment in the Commonwealth temporarily, notwithstanding that the equipment was acquired outside of the Commonwealth.
This interpretation of Va. Code §58.1-604 furthers the purposes and goals of the use tax. The purposes of the use tax are to eliminate the loss of business by local merchants because people who would buy in the taxing state go elsewhere to make tax-free purchases and to equalize the burden of this method of raising revenue equally upon goods purchased within the state and goods purchased outside the state for the purpose of use within the state. See Commonwealth v. Miller-Morton, supra.
To allow proration when property is acquired for use in the Commonwealth would, in effect, defeat these purposes. All purchasers of property for use in the Commonwealth for less than the useful life of the property could avoid the full payment of the tax by purchasing the property out of state. No such proration would be available to persons who purchase such property within the Commonwealth, although the persons may know at the time of purchase that the property will not remain in the Commonwealth for the entire useful life of the property. This result would disadvantage local merchants and, to meet revenue demand, would place a heavier burden on those who purchase property within the Commonwealth.
On the other hand, when a person has purchased property for use outside the Commonwealth but subsequently brings the property into the Commonwealth, proration does not have the effect of nullifying the purposes of the use tax statute. Under such circumstances, proration may be allowed based on the duration of use within the Commonwealth
Even assuming, for the sake of discussion, that the horses were acquired for use outside the state and subsequently brought into the state, the department has traditionally held that a partial exemption is not available in instances where the taxpayer is unable to determine at the time property is imported into Virginia the exact percentage of time that the property will be used in Virginia and how that amount of time bears to the total useful life of the property.
I have reviewed the information which the Taxpayer has submitted to the department and do not find basis to conclude that a partial exemption would be applicable in this case, even if the horses had been acquired for use outside the Commonwealth and subsequently brought into the Commonwealth. The Taxpayer's records show that while horses left Virginia after a stay of several months in Virginia, the racehorses were frequently returned to this state. The Taxpayer also indicated that horses may be returned to Virginia for rest and rehabilitation from injury before returning to the racetrack. Therefore, at the time the Taxpayer brought the horses into Virginia, the Taxpayer could not ascertain the actual duration of time of use of the horses within Virginia. As such, the Taxpayer would not have been able to accurately compute a partial amount of tax due under Va. Code §58.1-604 at the time of importation of the horses.
Based on all of the foregoing, I find that the department correctly held that the tax was due based on the cost price of the horses.
Allocation to Breeding Activity
It is my understanding that the horses produced by the Taxpayer' 8 breeding process may be sold or used for racing. In a prior determination, the department held that feed and supplies for horses produced through the breeding process are exempt until such time that the horses are sold, placed into training for racing, or used for some other nonagricultural activity. It further held that the exemption applies when a horse permanently retires from racing for use exclusively in breeding. See P.D. 88-231 (7/29/88), copy enclosed.
A horse will be deemed "permanently retired from racing" when the racing career of the horse is permanently terminated and the horse permanently sent back to the farm to be used exclusively for the purpose of breeding horses for sale. See P.D. 91-129 (7/12/91), copy enclosed. As such, the exemption may apply to the feed and supplies for such horses prior to the time the horse is actually bred for the first time. The Taxpayer's records should clearly show when a particular horse has been permanently retired from racing for purposes of breeding. The exemption would also apply to the feed and supplies for the horses which have been rejected from the Taxpayer's training program and returned to Virginia for breeding or sale. Further, as the Taxpayer maintains an inventory of horses which are offspring of the Taxpayer's broodmares, and such offspring may either be sold or raced, the tax would not apply to the feed and supplies for such offspring until they were either placed into training in Virginia for racing or used for some other taxable activity.
Based upon the above principles, I am asking the department's Technical Services Section and district office to review the Taxpayer's audit and make any necessary changes to the computations of taxable usage. It is possible, however, that some additional information may be required from the Taxpayer in order to complete the necessary revisions.
I trust this will answer the questions raised in your appeal. The audit revisions based on this determination will be held in abeyance for 30 days pending the Taxpayer's response to the department's reply to the offer in compromise proposed by the Taxpayer under Va. Code §58.1-105.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/3705E
Rulings of the Tax Commissioner