Tax Type
Retail Sales and Use Tax
Description
Public Service Corporations; Items Purchased by Electric Utility
Topic
Taxability of Persons and Transactions
Date Issued
01-23-1991
January 23, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear********************
This will reply to your letter of June 15, 1989, as supplemented by your letters of October 2, 1989 and December 17, 1990 and information presented to members of my staff in meetings held October 26, 1989 and October 26, 1990, seeking correction of sales and use tax assessments on behalf of your client,******************** (the "Taxpayer").
FACTS
The Taxpayer is a public service corporation subject to a state franchise or license tax based upon gross receipts, which provides electrical power to its customers. An audit of the Taxpayer for the period January 1985 through December 1987 produced assessments for the Taxpayer's failure to remit the sales and use tax on various purchases of tangible personal property.
The Taxpayer contests the assessments of tax on certain of the purchases included in the audit, contending that the property is used directly in the rendition of its public utility service. The Taxpayer further contends that the sampling technique used by the department's auditors does not accurately reflect the sales and use tax liability of the taxpayer for the audit period.
DETERMINATION
§58.1-608(3)(c) of the Code of Virginia provides an exemption from the sales and use tax for:
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- 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:
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- 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 authorities, I will set forth below the application of the tax to the items contested by the Taxpayer. The items will be discussed in the order presented in the Taxpayer's protest.
Fuel Management System Repair Items
These articles are used to repair and maintain components of the system used to move coal from storage piles into a boiler which produces steam to generate electricity. Components of the system include tractors and conveyors, a coal pulverizer and coal feeder, blower ducts, fans, and various supplies and tools used to repair these components.
Virginia Regulation (VR) 630-10-87(F) provides that for purposes of this regulation, production activities shall commence from the intake, receipt or storage of raw materials (coal...etc.) at the utility's production plant site or at the utility's source of supply. As the fuel management system components are used to move the coal from the utility's coal storage piles to the boiler, such components are deemed to be exempt production devices. The items in question are therefore also exempt of the tax under the above regulation as equipment, machinery, supplies, tools, or repair parts used to keep in operation exempt production devices.
Boiler Repair Items
Repair items consisting of bevelers, scaffolding, welding machines and rods, cutting saws and other tools and supplies are used to repair components of the boiler described above. As the boiler is deemed to be used directly in production, the items used to repair the boiler are also generally exempt of the tax under VR 630-10-87(F). Scaffolding is generally subject to the tax as a structure under footnote 4 of this regulation. Directly analogous to this footnote is footnote 4 of H(2) of the above regulation which specifically provides that scaffolds are taxable. Therefore, the scaffolding at issue here was correctly held taxable in the audit.
Demineralization System
Water used in the boiler must be purer than distilled water for the boiler to function properly. The demineralization system consists of equipment and supplies which are integral parts of the boiler system and which demineralize and purify the water entering the boiler. The demineralization system is necessary to keep the Taxpayer's production system in operation. It is indispensable to the actual provision of the utility's public service and used immediately in the performance of such service. As such, the demineralization system qualifies for exemption under VR 630-10-87.
Controls for Boiler and Feedwater Heater; Fireball Controls
The Taxpayer does not identify the specific equipment at issue here with respect to the boiler and feedwater heater. However, it is my understanding that the items referred to as controls for the boiler and feedwater heater actually monitor the operation of these units. The fireball control equipment is a closed circuit television system which enables the control room to insert into or retract from the boiler a camera lens tube for observation to determine whether to vary the mixture of oxygen and coal to increase or decrease heat, thereby raising or lowering power generation.
Based on the information before me, these devices are used directly in keeping the utility's production system in operation and qualify for exemption in accordance with the provisions of VR 630-10-87.
Steam Turbines: Repairs; Lubrication System; Vibration Gauges
A laser optic shaft alignment system, amp meters, and hydraulic cutters are used to repair components of steam turbines which generate electricity. Blowers are used to exhaust fumes from turbine modules while repairs are being made. Certain articles are used to lubricate and oil the turbine during operation. Vibration gauges determine the vibration levels of the steam turbine, generator, and shaft. If the vibration levels are too great, plant operators must shut down the unit to avoid damage to the system and make repairs.
As the alignment system, amp meters, cutters, and items used to oil and lubricate the turbine are used in the repair and maintenance of exempt production equipment, the exemption applies. However, the blowers do not qualify for the exemption as they are not essential to or an immediate part of the repair function. The vibration gauges are exempt to the extent used to identify repair and maintenance needs.
Cooling System: Intake Pipes; Chlorination System; Battery
The cooling system condenses used steam and recirculates it to the boiler tubes for reuse in generating electricity. The intake pipes bring water into the cooling system. The chlorination system adds chlorine to the cooling water to prevent the growth of algae and clogging of the system. The battery serves as a replacement battery for the DC controls that operate the mechanical components of the cooling system.
Like the demineralization system above, the chlorination system is used directly in the production process. Additionally, the intake pipes qualify for exemption as VR 630-10-87(F) provides that production activities commence from the intake of raw materials (coal...water) at utility's production plant site or at the utility's source of supply. The battery is used to provide power to exempt production equipment. As such, the exemption applies to the battery in question.
Pollution Control Equipment
A camera system is used to monitor emissions from a smoke stack. The Taxpayer claims exemption under Va. Code §58.1-3660, asserting that this camera system could be certified as exempt pollution control equipment; however, the Taxpayer has not provided the department with certification from the proper state authorities. The equipment is not used directly in production, transmission, or distribution.
Va. Code §58.1-608(3)(I) provides an exemption for certified pollution control equipment and facilities as defined in Va. Code Section 58.1-3660. In order to qualify for this exemption, certification of the equipment's pollution control status must be obtained from the state Water Control Board or Air Pollution Control Board, whichever is applicable. once certification has been obtained, exemption is available through application to this department.
Nuclear Plant: Reactor Temperature Controls; Reactor Vessel Monitoring Equipment; Reactor Coolant Gauge
These articles consist of controls which gauge the temperature of the reactor head, monitor operations in the reactor vessel, and determine the temperature and pressure of the reactor coolant. As they are used directly in controlling the reactor and keeping the utility's production system in operation, the exemption applies.
Snubbers
These devices are components of the piping system for the reactor coolant and steam feed water. The snubbers act as shock absorbers when the piping system fluctuates, for example during heat expansion or earthquakes. They maintain the piping system in working order by preventing breaks in the system. These devices are used directly in keeping the utility's production system in operation. As such, I find that the snubbers properly qualify for exemption under VR 630-10-87.
Repairs to Reactor Coolant Pump
The reactor coolant pump circulates water through the reactor to cool the reactor and absorb heat used to generate steam. As this device is used directly in production, tools and equipment used to repair it are exempt under VR 630-10-87.
Control Rod Driver
The control rod driver moves fuel rods into and out of the reactor core to increase or decrease nuclear activity. As this device is used directly in production activities, the exemption applies.
Pressurizer: Relief Valves; Repairs; Monitors & Gauges
The pressurizer maintains system pressure during operation of the nuclear reactor. The component parts of the pressurizer, such as the relief valves, and tools and equipment used to repair this device qualify for the exemption. Additionally, like the above monitors and gauges for the reactor, the associated monitors and gauges for the pressurizer are also exempt.
Containment Sump: Sump-pumps, Pipes, Repairs; Resin Catch Tank
The containment sump system acts as a second cooling system for the reactor used to generate electricity. The resin catch tank removes radioactive particles from the reactor coolant water to prevent reactor overheating. Based on the information provided, these articles are used immediately in production activities and qualify for exemption.
Turbine Building: Main Generator Repairs; Condenser
The condenser is an integral part of the reactor's water cooling system and the equipment and tools in question are utilized in repairing the generator, an exempt production device. As such, these articles are exempt.
Reactor Control Room Modifications
Modifications were made to reactor controls which monitor water temperature, pressures, chemical concentrations and power output. As the reactor controls are used directly in controlling the reactor and keeping the production system in operation, modifications to the controls qualify for the exemption.
Radiation Containment and Detection Systems
These articles consists of ventilation fans used to draw air from the nuclear containment building and tangible personal property used to remove contaminated clothing, tools and other products from the plant. The radiation detection system consists of radiation detectors, radiation badges, badge readers, calibrators and other monitoring devices located throughout the plant to monitor the exposure of workers to various types of radiation.
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. Additionally, this regulation provides as taxable, plant ventilation systems and safety and first-aid equipment (except protective clothing worn by production, transmission, or distribution plant employees when furnished gratuitously by a public utility). While the ventilation fans and equipment used to remove contaminated articles from the plant may be necessary for the safe operation of the plant, these articles are not used directly in the rendition of the utility's service.
Further, it is my understanding that any personal protective articles analogous to the methanometers and first aid equipment addressed by the Virginia Supreme Court in Commonwealth v. Wellmore Coal, 228 Va. 149, 320 S.E.2nd 509 (1984) were not included in the department's audit. The radiation monitoring devices placed throughout the plant by the Taxpayer do not appear analogous to the personal type items addressed in Wellmore. However, the department's auditors will review the items held taxable and will remove any exempt personal radiation safety devices such as radiation badges worn by production employees.
Bases for Transmission Poles
Transmission pole bases are 16 ft. long cylinders which are buried in the ground and into which the longer portion of the poles fit. The cylinder is first set in the ground. The pole is placed in the cylinder and the two are joined by concrete. While VR 630-10-87 provides an exemption from the tax for transmission line poles, the regulation specifically states that foundations and settings are taxable. Based on the information before me, I find that the base into which the transmission pole is set is a taxable foundation or setting under the above regulation.
Automation and Control Equipment: Fault Recorders
These items consists of fault recorders and associated remote terminal units, transceivers and communication receivers. Fault recorders are electronic devices which identify and locate transmission interruptions to permit servicing of damaged facilities by repair crews. Remote terminal units and various communications to them allow the Taxpayer to open and close circuits to isolate transmission problems and compensate for losses of power in the system.
A July 29, 1988 ruling (P.D. 88-221) issued by the department determined that telemetering equipment similar to that at issue here would be exempt only to the extent shown that it functioned to identify specific repair and maintenance problems of exempt equipment. Based on the information presented by the Taxpayer, I find that the Taxpayer's fault recorders and associated equipment would also be exempt to the extent used in identifying such specific repair and maintenance problems.
Steel Transmission Poles
Steel poles serve to carry lines from the transmission system into the substation and between transformers and other equipment within substations. As such poles are exempt under VR 630-10-87, they will be removed from the audit. It is my understanding that the department's auditors were unable to identify these items as transmission poles at the time of the audit.
Control Equipment: Sequence of Event Recorders
You indicate that this equipment performs functions similar to those performed by the fault recorders described above. Therefore, as indicated above for the fault recorders, the equipment in question here would be exempt only to the extent used to identify specific repair and maintenance problems. However, such equipment is taxable to the extent used to merely collect and log data for analysis.
Lifting Equipment
To the extent that hoists, cranes, and forklifts are used in the repair and maintenance of exempt substation equipment, overhead lines and transmission poles, such equipment qualifies for the exemption. However, equipment such as the forklifts are taxable to the extent used in other activities, such as the general loading and unloading of trucks and moving of items at warehouses and plants.
Concrete Conduits and Steel Pipes
These articles are used to run wiring among exempt equipment. They serve some of the same functions as rubber insulation on distribution wires, that is, to protect the metal part of the wire from damage, insulate the wire from grounding and other contact, and serve as essentially a part of the wiring. I consider these items to be used directly in transmission and distribution and exempt from the tax under Va. Code §58.1-608(3)(c).
Fences; Concrete Pads; Concrete Enclosures
Fences are placed around substations for purposes of safety and to protect against interruptions caused by animals. Concrete pads serve to provide a foundation for substation equipment and to provide insulation from the ground. Concrete enclosures protect equipment from the weather and from interference from animals.
Foundations are subject to the tax as a structure under the footnotes to the electric utility accounts contained in VR 630-10-87. Directly analogous to these footnotes is footnote 4 of §H(2) of this regulation which specifically provides that enclosures and fences are taxable. Moreover, the regulation provides that the exemption does not apply solely because the use of an item may be required by law or practical necessity. I find that these items are not used directly in the rendition of the utility's public service.
Substation Batteries
These batteries are part of a total backup electrical system for the substation to permit operation of substation equipment in the event of a power outage. The batteries in question are exempt to the extent used to provide power for exempt substation equipment.
Mobile Radio System
Communications equipment is installed in maintenance vehicles for use in repair and maintenance activities. Communications equipment used by electric utilities is generally taxable in accordance with the footnotes to the electric utility accounts contained in VR 630-10-87. However, §G of this regulation provides in part that vehicles and their equipment as are specifically designed and equipped for such use are exempt from the tax when used to keep a utility's transmission or distribution system in operation or repair. Therefore, if the Taxpayer's vehicles are specially designed or equipped for use in maintenance or repair work, communications equipment used in the dispatching of such vehicles is exempt from the tax.
Microwave and Fiber optic Communication Circuits
The Taxpayer employs microwave and fiber optic communication circuits for data transmission. Approximately 30% of the circuits are used for operational functions and 70% for administrative activities. These circuits also allow for the remote control of exempt equipment. Based on the information presented, an exemption will be allowed to the extent the circuits are used for exempt operational functions, such as load control and the identification of repair needs. The Taxpayer concurs that circuits used for administrative activities are subject to the tax.
Telephone PBX; Tie lines
Certain voice communication links are also essential to keeping the utility's production, transmission, and distribution system in operation. Such communications identify and locate repair needs, dispatch repair crews, and play an integral part in load control and repair functions. The Taxpayer maintains as a separate system one telephone PBX for telephone communications between its central control center and power plants. This PBX is used exclusively on operational functions. Components of the PBX system include a main switch, wiring, telephones, battery power sources, software, and voice Messageing units. A system of tie lines connects district and division headquarters and are used for both operational and administrative functions.
Like the microwave and fiber optic communication circuits above, an exemption will be allowed only to the extent these articles are used for exempt operational functions, such as load control and identification of repair needs.
CICS Data Network
This communication system allows a central data bank to maintain records for customer accounting information. It utilizes a mainframe computer, local computer terminals and modems. As this system is used exclusively for administrative purposes, it is taxable in full.
Alarm System
The Taxpayer indicates that the alarm system consists of various monitors located throughout its generation, transmission and distribution systems. The system allows the Taxpayer to locate and identify problems and make repairs. The Taxpayer does not indicate the specific equipment monitored by this system. However, this system would be exempt only to the extent used to identify specific repair and maintenance needs of exempt equipment. The surveillance of buildings and equipment and the monitoring of nonexempt equipment would be taxable activities.
System Control and Data Accusation System (SCADA)
The SCADA system is a digital communicating system which alerts control centers to changes in the transmission and distribution systems (e.g., drops in power levels) and then permits the remote control of exempt equipment. Based on a September 27, 1985 ruling (P.D. 85-184) issued by the department which addressed the taxability of equipment performing similar functions, the SCADA system is exempt to the extent used to exercise remote control over exempt equipment. The system is also exempt to the extent used in repair functions to respond to alarms or analyze failures in exempt equipment. However, the system is taxable to the extent used to log events or perform other administrative tasks.
Automatic Ring Down System (ARD)
This system provides dedicated telephone lines from the control center to power stations. A power station manager needing to communicate with the control center simply picks up a telephone which causes the control center's telephone to ring automatically. Control staff can also use such lines to communicate with the power station. As provided above with respect to the communication circuits, telephone PBX and tie lines, an exemption will be allowed for the ARD to the extent used in exempt operational functions only, such as the identification of repair needs.
Sampling Techniques
Sampling is a generally accepted auditing practice which is widely utilized as an accurate audit procedure when the volume of records makes a detailed audit impractical. Properly applied sampling techniques result in computations which fall within a narrow percentage range of the actual amount that would be determined in a full detail audit. The courts have consistently held that a tax assessment made by the proper authorities is prima facie correct and valid and that the burden of proof is upon the taxpayer to prove otherwise.
It is the department's understanding that at the time of the audit the Taxpayer specifically consented to the sampling procedures and declined to expand the length of the sample periods due to the large magnitude of records which would be required and the limited number of the Taxpayer's personnel which were available to assist in the audit. Additionally, it is my understanding that the Taxpayer selected the specific sample periods as representative of the entire audit period and requested that capital assets be sampled.
Based on a review of the audit techniques and the information presented by the taxpayer, I do not find basis to conclude that the sample used by the auditors was invalid. Nonetheless, at the request of the Taxpayer, the department would consider expanding the sample periods, performing a detailed audit of fixed assets, reviewing any documentation which the Taxpayer could provide to support its claim of double taxation and adjusting the audit accordingly.
Having reviewed the above issues with the Taxpayer, under the authority provided to the Tax Commissioner under Virginia Code §58.1-105 the department has accepted the Taxpayer's recent payment as full settlement of the audit liability.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner