Tax Type
Retail Sales and Use Tax
Description
Dredging contractor; Crew boat and dredging supplies
Topic
Property Subject to Tax
Date Issued
04-30-1993
April 30, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will reply to your letter of November 11, 1992, in which you seek correction of retail sales and use tax assessments for *************(the "Taxpayer").
FACTS
The Taxpayer is a dredging contractor primarily engaged in the dredging of interstate waterways in Virginia and other states. Dredging is also performed from the main shipping channels to various docks, terminals and piers for the military, public terminals and private concerns. The Taxpayer was audited for the period March 1, 1988 through February 29, 1992 and contests the assessment of tax on its purchases of supplies used on its dredges and materials used in renovating certain vessels on the basis that the purchases qualify for exemption from the tax under Va. Code §58.1-608(A)(3)(d).
DETERMINATION
Va. Code §58.1-608(A)(3)(d) provides an exemption from the sales and use tax for:
-
- Ships or vessels used ... exclusively or principally in interstate or foreign commerce, or repairs and alterations thereof; or fuel and supplies for use or consumption aboard ships or vessels plying the high seas ... or tangible personal property used directly in the building, conversion or repair of the ships or vessels covered by this subdivision.
Traditionally, the department has interpreted this statute to provide an exemption for dredges and attendant vessels (such as barges upon which silt from the dredging process is loaded) when they are engaged in the dredging of interstate waterways. Virginia Regulation (VR) 630-10-98 provides that the above referenced exemption is restricted to the ships or vessels described therein and not to other ships, vessels, boats or other watercraft.
Crew boat, equipment barges and survey boat renovations
The facts presented indicate that the crew boat is used to transport crew members between the shore and the dredging site. The equipment barges are used to carry and hold various equipment, materials and supplies for use in the dredging process; the survey boat is used for surveying purposes only.
The Tax Commissioner has previously ruled that barges used to move employees, material, equipment, trash, etc. to and from the dredging site are deemed not to be used in interstate or foreign commerce as they are not physically involved in the dredging of an interstate waterway. See P.D. 88-18 (1/4/88). None of the vessels in question are physically involved in the actual dredging process; therefore, they are deemed not to be used in interstate commerce.
Furthermore, even if it is assumed that the vessels in question were used in interstate commerce (which they are not), there is no evidence that they were used exclusively or principally in interstate or foreign commerce. While you point out in your letter that the vessels are documented with the U.S. Coast Guard, such documentation in no way establishes that the vessels are used exclusively or principally in interstate commerce (as even noncommercial vessels can be documented). Therefore, the renovations to the crew boat, equipment barges and survey boat do not qualify for the exemption under Va. Code § 58.1-608(A)(3)(d).
You contend that the department has departed from past practices and interpretations of the law in applying the exemption. To the contrary, the auditor's position is consistent with the department's established policy. You state that the statute "does not make a distinction of the type of vessel or its use." However, the statute clearly does make a distinction, requiring that the ship or vessel must be used exclusively or principally in interstate commerce. Finally, maintain that the policy in P.D. 88-18 is inapplicable to your situation because the facts and circumstances are entirely different from your operation; however, you have not developed facts to substantiate your claim.
Accordingly, the assessment of tax on the materials and supplies purchased and used in the renovation of the vessels is correct.
Supplies used in the dredging process
You maintain that rope, chlorine, chairs, welding equipment, dredge buoys, chains and other supplies are an integral part of the vessels engaged in interstate commerce and, therefore, qualify for the exemption.
While the exemption for ships or vessels is broad, it does not cover all tangible personal property used in interstate or foreign commerce. The exemption covers repair parts and alterations to ships or vessels which are used exclusively and principally in interstate commerce and personal property used directly in the building, conversion or repair of such vessels. From the facts presented, it appears that none of the items at issue are repair or replacement parts of the dredge or attendant vessels engaged in interstate commerce, nor are they used directly in the building, conversion or repair of such vessels.
The welding equipment, rope, chlorine tablets, dredge buoys, etc. are not fixtures of the dredge and are not physically involved in the actual dredging process. The specified tangible personal property may be necessary to the dredging operation, but it is not used directly in the building, conversion or repair of the vessels used in interstate commerce. Therefore, the items are taxable.
You maintain that these items were previously considered exempt by the department in a prior audit. However, a review of the prior audit's workpapers indicates that many items were held to be taxable; other items were not exempted, but rather were not an issue raised at that time.
A member of my Tax Policy staff contacted you concerning additional information you may have to support your position. Because you have not supplied the necessary information, the information on which the assessment was originally based is presumed to be the best available. The assessment of tax and interest is, therefore, correct as made and is now due and payable. The department will no longer suspend collection action. Should you choose to submit more information after the assessment is paid, the department will consider it.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6549F
Rulings of the Tax Commissioner