Were replacement parts and tires for trucks carrying exempt oil-and-gas drilling equipment also exempt from Virginia sales tax?

Subject

Items used on exempt mining and mineral processing machinery and equipment

Plain-English summary

An oil-and-gas service provider used nitrogen, fracturing, pre-blender, and equipment trucks carrying specialized machinery. It argued that replacement tires, filters, gears, belts, and similar supplies should be exempt because the mounted equipment was used in exempt drilling.

Virginia split the result between the vehicles and the mounted machinery. The trucks themselves were not used directly in drilling, so parts and supplies used to repair the trucks remained taxable. The specialized equipment mounted on those trucks was used directly in the exempt drilling process, so repair parts and supplies for that equipment qualified under the former exemption.

The ruling analogized the distinction to a concrete mixer truck: qualifying production equipment and its connecting parts may be exempt while the vehicle chassis and other truck components are taxable.

What this means for you

• An exemption for production or drilling machinery does not automatically cover the vehicle carrying it.
• Track repair parts by the specific component they service: exempt mounted equipment versus taxable truck or chassis.
• The statute quoted in this ruling ended July 1, 2006, so current purchases require a current-law check.

Citations and references

• Va. Code § 58.1-609.3(12), former exemption for items used directly in oil-and-gas drilling and processing.
• Va. Code § 58.1-602, definition of used directly.
• 23 VAC 10-210-360, concrete mixer truck distinction.
• P.D. 01-129, P.D. 85-50, and P.D. 94-59, treatment of truck and equipment parts.
• Golden Skillet Corp. v. Commonwealth, strict construction of tax exemptions.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-71

Original ruling text

May 18, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which * (the "Taxpayer") requests a ruling regarding the application of the retail sales and use tax to replacement parts and tires used on exempt mining and mineral processing machinery and equipment. The ruling request is a result of an audit by the Department in which such replacement parts and tires were held taxable. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer provides products and services to oil and gas industries. In providing its services, the Taxpayer uses trucks and specialized equipment. The Taxpayer purchases replacement parts and supplies including tires, oil and air filters, gears, belts, and other similar parts and supplies needed to keep its trucks and equipment in working order.

The Taxpayer cites Public Document (P.D.) 01-129 (9/14/01) and states that the Tax Commissioner determined that replacement parts for trucks are exempt if the trucks are exempt as mining and mineral processing machinery and equipment. The Taxpayer contends that its equipment is used in an exempt manner, and replacement parts it purchases should qualify for exemption in the same manner as those addressed in P. D. 01-129.

DETERMINATION

Virginia Code § 58.1-609.3 12 provides a retail sales and use tax exemption for the following:

From July 1, 1994, and ending July 1, 2006, raw materials, fuel power, energy, supplies, machinery or tools, or repair parts therefor or replacement thereof, used directly in the drilling, extraction, refining, or processing of natural gas or oil and the reclamation of the well area . . . For the purposes of this section "drilling," "extraction," "refining," and "processing" shall include production, inspection, testing, dewatering, dehydration, or distillation of raw natural gas into a usable condition consistent with commercial practices, and the gathering and transportation of raw natural gas to a facility wherein the gas is converted into such a usable condition. Machinery, tools and equipment, or repair parts therefor or replacement thereof, shall be exempt if the preponderance of their use is directly in the drilling, extraction, refining, or processing of natural gas or oil for sale or resale, or in well area reclamation activities required by state or federal law. [Emphasis added.]

The term "used directly" is defined in Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product . . . but not including ancillary activities such as general maintenance or administration."

P.D. 01-129

A closer inspection of P.D. 01-129 shows that the application of the tax to truck replacement parts was dependent upon the use of the trucks and backhoe. In that document, the Tax Commissioner placed emphasis on the term "used directly." The determination addressed various items and stated that the auditor would further review the use of the trucks to determine if any pro-ration of the parts, supplies and tires was required.

In this instance, the auditor has reviewed the Taxpayer's use of trucks in its mining operations and concluded that the trucks were not used directly in such operations. The auditor corresponded with the Taxpayer in a letter dated February 7, 2005, relating this position. The auditor also explained that the Taxpayer's use of trucks and equipment in its mining operations was analogous to concrete mixer trucks as outlined in the Department's regulation under Title 23 of the Virginia Administrative Code 10-210-360.

As provided in the regulation, the manufacturing exemption applies to the rotating mixer and the accessory parts necessary for connection to the motor on concrete mixer trucks. The exemption, however, is not applicable to the remaining chassis, parts, and attachments to the vehicle portion of the truck.

With regard to the Taxpayer's nitrogen trucks, fracturing trucks, pre-blender trucks and equipment trucks, the auditor has reviewed the use of these trucks and noted that while the trucks themselves are not used directly in exempt drilling services, the equipment that is mounted on the trucks is used in exempt drilling services. As the Taxpayer's trucks are not used directly in the mining process and are not allowed the exemption, the parts and supplies used in repairing these trucks do not enjoy the exemption from the tax. This is consistent with the Department's policy on parts and supplies for concrete mixer trucks in Title 23 of the Virginia Administrative Code 10-210-360. Accordingly, the parts and supplies used to repair the Taxpayer's trucks were properly held taxable in the Department's audit. See also P.D. 85-50 (3/14/85) and P.D. 94-59 (3/14/94).

With regard to the equipment that is used directly in the exempt drilling process and mounted on the trucks, the parts and supplies purchased for repair of such equipment are exempt from tax pursuant to Va. Code § 58.1-609.3 12.

The Department's policy with respect to sales and use tax exemptions is dictated by the rule of strict construction as established by the Virginia courts. The Virginia Supreme Court has consistently held that "exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1973).

The Code of Virginia sections, regulation and public documents 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 ruling, please contact * of the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/55625Q