Was an excavator used to resize firewood for a wholesale greenhouse's heating boilers exempt as agricultural or manufacturing equipment?

Subject

Excavator used to resize boiler fuel was taxable ancillary equipment

Plain-English summary

Virginia upheld use tax on the excavator and accessories. The taxpayer operated a wholesale greenhouse and bought logs to heat climate-controlled greenhouses. It used the excavator and attachments to cut the logs down to a size that would fit its boilers.

The greenhouse operation itself qualified for Virginia's agricultural exemption, but the exemption covered property necessary for agricultural production. The Department viewed preparing boiler fuel as an ancillary activity rather than part of the actual production of agricultural products for market.

The industrial manufacturing or processing exemption did not change the result. That exemption can cover equipment used to produce products for sale or resale, but this taxpayer consumed the resized logs itself as heating fuel.

What this means for you

• Qualifying as a farm, nursery, or greenhouse does not exempt every item of equipment used somewhere in the operation.
• Equipment used to support production can remain taxable when its function is classified as ancillary rather than direct agricultural production.
• Producing or processing an item for the taxpayer's own use is different from producing a product for sale or resale under the manufacturing exemption.

Common questions

Did the greenhouse qualify for the agricultural exemption generally?

Yes. The ruling accepted that the greenhouse and nursery operation qualified, but found that this particular equipment use fell outside the exemption.

Why was resizing the logs considered ancillary?

The excavator made fuel suitable for the boilers; it did not directly produce the greenhouse's agricultural products for market.

Would processing logs for other businesses change the analysis?

Potentially. The ruling acknowledged an exemption for industrial processors or manufacturers producing products for sale or resale, but these logs were used by the taxpayer itself.

Citations and references

• Va. Code § 58.1-609.2(1).
• Virginia Public Documents 98-197, 05-133, and 09-100.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-153

Original ruling text

October 16, 2009

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

Dear *:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period August 2005 through July 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a wholesale greenhouse. The Taxpayer purchases wood logs that are used as a fuel source to heat climate-controlled greenhouses. The Department audited the Taxpayer and assessed use tax on an excavator and accessories used to resize and prepare the logs for burning in boilers that heat the greenhouses. The Taxpayer claims the excavator and accessories qualify for the agricultural exemption.

DETERMINATION

Agricultural Exemption

Virginia Code § 58.1-609.2 1 provides an exemption for:

Commercial feeds; seeds; plants; fertilizers; liming materials; breeding and other livestock; semen; breeding fees; baby chicks; turkey poults; rabbits; quail; llamas; bees; agricultural chemicals; fuel for drying or curing crops; baler twine; containers for fruit and vegetables; farm machinery; medicines and drugs sold to a veterinarian provided they are used or consumed directly in the care, medication, and treatment of agricultural production animals or for resale to a farmer for direct use in producing an agricultural product for market; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor; and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production, which also includes beekeeping and fish, quail, rabbit and worm farming for market.

Based on existing law and the Department's current policy, the Taxpayer's greenhouse and nursery operation qualifies for the agricultural exemption. The exemption is limited to purchases of tangible personal property necessary for use in agricultural production. The equipment at issue is used to cut wood logs to a size that will fit in boilers used to heat the Taxpayer's greenhouses. The Department has ruled that equipment used in activities ancillary to agricultural production does not qualify for the exemption. In this case, the excavator and attachments are used to produce fuel for boilers. This activity is an ancillary activity that is not part of actual agricultural production.

In Public Documents (P.D.) 98-197 (11/30/98) and 05-133 (08/10/05), the Tax Commissioner ruled that equipment purchased by farmers did not qualify for exemption because the equipment was used in activities ancillary to agricultural production. In this case, the treatment of the Taxpayer's use of the excavator and accessories is consistent with the types of use considered ancillary to agricultural production by the Department in the cited documents. Based on the Department's existing policy and the lack of a specific statutory exemption for the Taxpayer's use of the equipment, the equipment was properly held taxable in the audit.

The Taxpayer notes that the equipment would qualify for exemption if used to process the wood logs for use by other businesses. The Taxpayer is correct that an exemption exists for industrial processors and manufacturers that produce products for sale or resale. In this case, however, the Taxpayer produces resized wood logs that are not for sale but are used by the Taxpayer as fuel to heat greenhouses. Thus, the exemption would not apply. Recently, the Department issued P.D. 09-100 (7/24/09), which discusses a similar issue.

Conclusion

The assessment of use tax on the excavator and accessories is correct. The Taxpayer will be issued an updated bill that reflects interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.

The Code of Virginia section and public documents 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 regarding this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3167115443.S