Did lumber-mill catwalks, supports, measuring computers, cleanup equipment, ATVs, and tractors qualify for Virginia production exemptions?

Subject

Agricultural exemption for items used directly in the harvesting of forest products

Plain-English summary

Virginia upheld tax on every contested lumber-mill item because none was used directly in exempt manufacturing or forest harvesting. Being useful or essential to the business was not enough.

Steel tubing and grating formed catwalks, which the regulation specifically treated as taxable even when they gave operators access to production machinery. Rebar, anchor bolts, and beams supported the green-chain sorter but were separately purchased structural materials affixed to realty, not component legs of the exempt machine.

The field computer and log rulers recorded wood species and board feet to pay loggers and maintain inventory. Those were administrative and recordkeeping functions, not immediate production control.

The Bobcat loader removed ash, bark, and sawdust as general mill cleanup. The ATVs sprayed water on mill roads for dust, and tractors scraped mill roads and log decks. Those vehicles worked at the mill rather than directly harvesting forest products at a harvesting site.

What this means for you

• “Essential” does not equal “used directly” in Virginia production exemptions.
• Catwalks, platforms, and structural supports may be taxable even when attached to exempt machinery.
• Computers used for inventory, payment, or production records are administrative unless they directly control production.
• Forestry equipment must be used directly in harvesting operations, not later mill-yard maintenance.

Citations and references

• Va. Code §§ 58.1-609.3(2), 58.1-602, 58.1-609.2(6), and 58.1-3660.
• 23 VAC 10-210-920(B)(2), (C)(1), and (C)(2).
• Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-203

Original ruling text

December 5, 2007

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period April 2003 through July 2006. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a lumber manufacturer. An audit by the Department resulted in the assessment of tax on untaxed purchases of tangible personal property. The Taxpayer takes exception to the use tax assessed on various equipment and parts used in its lumber manufacturing business. The Taxpayer maintains that all of the contested items are used directly in its manufacturing process or qualify for the agricultural exemption for items used directly in the harvesting of forest products.

DETERMINATION

Virginia Code § 58.1-609.3 2 provides an exemption from the retail sales and use tax for "machinery or tools or repair parts therefor or replacement thereof, fuel power, energy; or supplies, used directly in processing, manufacturing, refining, mining, or converting products for sale or resale." [Emphasis added.] Virginia Code § 58.1-602 defines the term "used directly" to mean "those activities which are an integral part of the production of a product, including all steps of an integrated manufacturing or mining process, but not including ancillary activities such as general maintenance and administration." Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B 2 interprets the above statutes, stating the following:

Items of tangible personal property which are used directly in manufacturing . . . are machinery, tools and repair parts therefor, fuel energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process . Convenient or facilitative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing even though such items may be directly attached to exempt production machinery.

Accordingly, the fact that an item is essential to production is not sufficient for exemption based on the Virginia Supreme Court's holding that "essential items which are not an immediate part of actual production are not exempt." See Webster Brick Company, Inc. v. Department of Taxation , 219 Va. 81, 245 S.E.2d 252 (1978).

In addition, Title 23 VAC 10-210-920 C 2 discusses production activities conducted by manufacturers and lists examples of taxable and exempt tangible personal property used in production. Based on the above authorities, I will address the application of the tax to the items contested by the Taxpayer.

Steel Tubing and Bar Grating

The Taxpayer states that the steel tubing and bar grating were used for catwalks connected to the machinery, making it accessible for operators. Title 23 VAC 10-210-920 C 2 addresses the manufacturing exemption and provides a list of taxable items that includes "Catwalks, walkways, etc., regardless of whether used to provide access to production machinery for the operation, maintenance or repair of such machinery." Based on this regulation, there is no basis for relief of the tax assessed on the purchase of the steel tubing and bar grating.

Steel Rebar, Anchor Bolts and Beams

The Taxpayer states that the steel rebar, anchor bolts and beams are used as structural support for the green chain sorter machine. The green chain sorter separates lumber into bins by length, grade and species. Title 23 VAC 10-210-920 C 2 lists taxable items that are used in the production function and specifically states that the tax is applicable to "materials and apparatus used to support exempt production machinery, including flooring, concrete and metal platforms, etc., except supports or legs which are a component part of exempt production machinery and do not become affixed to realty."

Based on the above, and the information provided in your appeal, I find that the steel rebar, anchor bolts and beams are taxable. In order for these items to be exempt, they must be a component part of the exempt machinery and must not become affixed to realty. In the present case, the steel rebar, anchor bolts and beams were not purchased as part of the exempt equipment, but were purchased separately. Accordingly, I find no basis for revising the audit with respect to these items.

Allegro Field Computer and Folding Log Rulers

It is my understanding that the field computer and log rulers are used in the log yard. The computers record the species of wood and board feet of lumber in the log as a basis for which to pay the logger. The data is entered into the computer and transmitted to the accounting office so a check can be generated for the logger. The computer is also used to keep an inventory of logs by wood type and board feet in the log yard.

Based on the facts presented, the contested equipment is used in a taxable administrative capacity. Pursuant to Title 23 VAC 10-210-920 C 1, the term "administration" includes "items used in record keeping and other administrative or managerial activities, whether on or off the assembly line." Administrative items also include "computer hardware and canned software, calculators, and other items used to record the quality and quantity of work in production or goods in storage, the flow of work, and the results of inspections."

The contested items do not actually direct or control any part of the operation of the machinery or production line quality control operations and are not an immediate part of production. Accordingly, the field computer and log rulers are used in an activity that is a step removed from direct use in production and are, therefore, taxable.

Bobcat Loader

It is my understanding that the loader is used for general mill cleanup including ash removal from the boiler and removing spilled bark and sawdust.

Pursuant to Title 23 VAC 10-210-920 C 2 "[t]angible personal property used to dispose of plant wastes and pollutants other than equipment designated as certified pollution control equipment under the provisions of § 58.1-3660 of the Code of Virginia ," is taxable. Based on the facts presented, the bobcat loader is used in a taxable capacity.

All Terrain Vehicles and Tractors

It is my understanding that the all terrain vehicles are used to spray water on the mill yard and driveways to keep dust to a minimum. The tractors are used to scrape the mill roads and log decks to remove debris. The Taxpayer contends that these items are exempt under the agricultural exemption for harvesting of forest products.

Virginia Code § 58.1-609.2 6 provides an exemption from the retail sales and use tax for:

Machinery or tools and repair parts, therefore or replacements thereof, fuel, power, energy or supplies, used directly in the harvesting of forest products for sale or for use as a component part of a product to be sold. Harvesting of forest products shall include all operations prior to the transport of the harvested product necessary for (i) removing timber or other forest products from the harvesting site, (ii) complying with environmental protection and safety requirements applicable to the harvesting of forest products, (iii) obtaining access to the harvesting site, and (iv) loading cut timber or other forest products onto highway vehicles for transportation to storage or processing facilities.

The term "used directly" in Va. Code § 58.1-609.2 6 significantly narrows the scope of the exemption to include only those activities that are an integral part of the actual harvesting of the forest product. The functions of the all terrain vehicles and tractors are a step removed from the harvesting of the forest product and are not used directly in the actual harvesting of the forest product. Of equal importance is the fact that the all terrain vehicles and tractor are used in the mill yard and on mill roads and not in the performance of logging operations. Therefore, the all terrain vehicles and tractors do not qualify for the agricultural exemption for harvesting of forest products.

CONCLUSION

Based on the foregoing, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *.

The Code of Virginia and regulation sections cited, along with other reference documents, 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 about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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