Did a Virginia country club have to charge sales tax on dyed diesel sold to members for pleasure boats?

Plain-English summary

The country club had to collect 5% Virginia retail sales tax on dyed diesel sold to members for pleasure watercraft. The club's own fuel purchases could be exempt purchases for resale, but the member sales were the taxable transactions that mattered.

Virginia's sales-tax exemption applied to fuel that was subject to the separate Virginia Fuels Tax, preventing double taxation. Dyed diesel used in pleasure watercraft was not subject to the fuels tax because it was not used to operate highway vehicles.

That fuels-tax exemption had the opposite effect under the sales-tax statute: because the member sales were not subject to Virginia Fuels Tax, they did not qualify for the sales-tax exemption. The ruling said no other statutory exemption covered dyed diesel used to propel pleasure boats.

The taxpayer's separate refund request was left for another letter.

What this means for you

• A resale exemption can remove tax from the club's purchase without exempting its later retail sale.
• The sales-tax exemption depended on the fuel being subject to Virginia Fuels Tax.
• Fuel exempt from the fuels tax was not automatically exempt from retail sales tax.
• The 5% rate and cited provisions are historical; verify current rates and statutes.

Common questions

Could the club buy the dyed diesel tax-free?

Yes, if it bought the fuel for resale as stated in the ruling.

Were the sales to members exempt because the fuel was dyed?

No. The pleasure-watercraft sales were subject to retail sales tax.

Did this ruling decide the refund claim?

No. It said the refund request would be addressed separately.

Citations and references

• Va. Code §§ 58.1-609.1(1) and 58.1-2226(4).
• 26 U.S.C. § 4082.

Subject

Assessed the retail sales and use tax on untaxed purchases of dyed diesel fuel

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-26

Original ruling text

March 30, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter and recent phone conversation with a member of the Appeals and Rulings staff in which you request a ruling concerning the application of the retail sales and use tax to purchases of dyed diesel fuel by * (the "Taxpayer").

FACTS

The Taxpayer operates a country club. You represent that the Taxpayer purchases dyed diesel fuel for resale to members of the country club for use in operating pleasure watercraft. In a recent audit of the Taxpayer by the Department, the Taxpayer was assessed the retail sales and use tax on untaxed purchases of dyed diesel fuel.

The Taxpayer contends that dyed diesel fuel is exempt from tax under Va. Code § 58.1-2226 and Va. Code § 58.1-609.1. The Taxpayer seeks a ruling from the Department that it is not required to pay the retail sales tax on its purchases of dyed diesel fuel.

RULING

It is my understanding that the Taxpayer purchases dyed diesel fuel for resale to its customers. According to the Department's auditor, this was not disclosed at the time of audit. Therefore, the auditor assessed the Taxpayer the use tax on the purchase of such fuel. Because the dyed diesel fuel is purchased for resale (an exempt transaction), the transaction to be examined is the Taxpayer's sale of the dyed diesel fuel.

Virginia Code § 58.1-609.1 1 exempts from the retail sales and use tax "[f]uels which are subject to the tax imposed by Chapter 22 (§ 58.1-2200 et seq. ) of this title." [Emphasis added.] Chapter 22 of Title 58.1 contains the Virginia Fuels Tax Act. The retail sales and use tax exemption for motor fuels was enacted to prevent motor fuels from being taxed under both the retail sales and use tax and the Virginia Fuels Tax.

Virginia Code § 58.1-2226 4 provides an exemption from the Virginia Fuels Tax for dyed diesel fuel, except for dyed diesel fuel used to operate a highway vehicle for a taxable use other than a use allowed under 26 U.S.C. § 4082. Because the dyed diesel fuel sold by the Taxpayer is used in operating pleasure watercraft and is not used to operate highway vehicles, the exemption in Va. Code § 58.1-2226 4 is applicable. Accordingly, the Taxpayer's sale of dyed diesel fuel to members for use in operating pleasure watercraft is not subject to the Virginia Fuels Tax.

Because the dyed diesel fuel sold by the Taxpayer to its members is not subject to the tax imposed by Chapter 22 of Title 58.1 ( i.e. , the Virginia Fuels Tax), the retail sales and use tax exemption in Va. Code § 58.1-609.1 1 is not applicable. Furthermore, there is no statutory exemption from the retail sales tax for dyed diesel fuel used to propel pleasure watercraft. Therefore, the retail sales and use tax applies to the Taxpayer's sales of dyed diesel fuel to its members for use in operating pleasure watercraft, and the Taxpayer is required to collect and remit to the Department the 5% retail sales tax on such sales.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result. The Taxpayer's request for refund will be addressed in a separate letter.

The Code of Virginia sections 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 concerning this ruling, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-292105815T