Did a contract chip-mill operator owe Virginia forest products tax when customers owned the logs and chips and claimed to pay the tax themselves?

Subject

Taxpayer was not registered for the forest products tax and failed to file a proper return

Plain-English summary

Virginia held the operator of two chip mills liable for forest products tax even though it performed contract chipping and never owned the logs or finished chips. The assessments for tax, penalties, and interest remained correct.

The statute imposed the tax on manufacturers or shippers of forest products for sale, profit, or commercial use and specifically defined a person operating a chip mill as a manufacturer. That operational definition controlled over the taxpayer's arguments about title and transportation.

The taxpayer said its manufacturer customers filed quarterly returns and paid tax on logs sent for processing. The auditor could not verify those payments. The Commissioner also explained that, even if customers had paid, their payments would have been erroneous; they could seek refunds within the applicable limitations period, but the operator still owed its own assessment.

What this means for you

• Forest products tax liability can follow the statutory role of mill operator rather than ownership of raw materials or finished goods.
• Contract processors should check registration, measurement, recordkeeping, and filing duties before beginning operations.
• A customer's tax payment does not necessarily discharge the person the statute makes liable.
• Claims that another party paid need documentary proof and may still require that party to seek its own refund.

Common questions

Did it matter that customers owned the logs and chips? No. The chip-mill operator itself met the statute's manufacturer definition.

Did the absence of transportation services change the result? No. The ruling based liability on operating the chip mills.

What if customers really paid the tax? The ruling says those payments would have been erroneous and potentially refundable within the statute of limitations.

Citations and references

• Va. Code § 58.1-1602 and § 58.1-1601(ii).
• Va. Code § 58.1-1823.
• P.D. 95-51 (March 23, 1995).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-167

Original ruling text

November 7, 2007

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

Dear *:

This is in reply to your letter in which you seek correction of the forest products tax assessment issued to * (the "Taxpayer") for the period July 2003 through September 2006.

FACTS

The Taxpayer operates two chip mill facilities in Virginia. The Taxpayer contracts with manufacturer customers to convert logs into wood chips for the customer's use. At the time of audit, the Taxpayer was not registered for the forest products tax and was not recording information required to compute the tax. As a result, the Taxpayer failed to file the appropriate returns and the Department issued assessments to the Taxpayer for tax, penalties and interest.

The Taxpayer disagrees with the Department's assessments, contending that it provides only contract chipping services to its customers and never takes title to the timber or the chips. Further, the Taxpayer does not provide transportation with regard to its services. The Taxpayer states that its customers file quarterly returns remitting the forest products tax on the logs delivered to the Taxpayer for processing. Accordingly, the Taxpayer seeks an abatement of the Department's assessment.

DETERMINATION

Virginia Code § 58.1-1602 imposes the forest products tax and states:

To provide further for the conservation of the natural resources of the Commonwealth by the protection and development of forest resources and reforestation of forest lands, there is hereby levied, in addition to all other taxes imposed, a forest products tax. The tax shall be paid by every person engaged in this Commonwealth in business as a manufacturer or shipper of forest products for sale, profit, or commercial use. (Emphasis added.)

Virginia Code § 58.1-1601(ii) defines a "manufacturer" as the person who "operates a cooperage mill, veneer mill, excelsior mill, paper mill, chipmill, chemical plant or other operation for the processing of forest products into products other than lumber . . . ." As an operator of a chip mill, the Taxpayer is deemed a manufacturer of wood chips and is liable for the forest products tax as assessed.

The Tax Commissioner rendered a similar decision in Public Document 95-51 (3/23/95). In this ruling, the Tax Commissioner held that a wood chipping operator producing wood chips for sale or commercial use was deemed a manufacturer of fuel wood and was solely liable for the payment of the forest products tax on such manufactured chips.

With regard to the payment of the tax by the Taxpayer's customers, the Department's auditor was unable to verify that such taxes were paid. Even if the Taxpayer's customers had paid the forest products tax, such taxes would have been erroneously paid and the customers would be entitled to a refund of all taxes paid that are within the statute of limitations as provided in Va. Code § 58.1-1823.

Based on the information presented, the assessments are correct as issued. Updated bills, with interest accrued to date, will be sent to the Taxpayer separately. No further interest will accrue provided the updated bills are paid within 30 days from the dates of the bill statements.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this matter, please contact * of the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1294815050.Q