Are scuba-tank compressed-air fill-ups taxable sales of tangible personal property in Virginia?

Subject

Sale of compressed air is taxable

Plain-English summary

Virginia upheld sales tax on scuba-tank compressed-air fill-ups. The shop filtered atmospheric air, compressed it with specialized machinery, and placed it in customers' tanks, sometimes also inspecting or pressure-testing them.

Compressed air was tangible personal property because it was measured and perceptible to the senses. Changing atmospheric air into compressed tank air was fabrication, and a retail fabricator had to collect tax on the sales price.

Virginia distinguished an earlier ruling on coin-operated tire pumps. There, compressed air was incidental to the customer's true object of tire-inflation service, and that ruling expressly excluded air sold in tanks or similar containers. For scuba fills, the true object was the compressed air itself.

What this means for you

• Gas can be taxable tangible property even though it begins as atmospheric air.
• Compression or other processing can be taxable fabrication.
• Incidental inspection does not make a product sale an exempt service.
• Prior audit silence does not establish that a transaction was reviewed or approved.

Common questions

Why were tire-pump transactions different?

The prior ruling treated the air as incidental to tire-inflation service and expressly did not extend that result to gas sold in tanks.

Did a prior audit protect the scuba shop?

No. The record did not show that the earlier auditor reviewed compressed-air sales or gave guidance.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-603.
• 23 VAC 10-210-660.
• 23 VAC 10-210-560 A and B.
• P.D. 87-158.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-46

Original ruling text

March 24, 2011

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period August 2006 through July 2009. I apologize for the delay in the Department's response.

FACTS

The Taxpayer sells and repairs scuba diving equipment. The Taxpayer also offers scuba tank fill-ups. The tanks are filled with compressed air using specialized machinery that reduces air volume while increasing its pressure inside the tank. As part of the fill-up, the Taxpayer may also check the tanks for safety and perform pressure tests.

As a result of an audit by the Department, the Taxpayer was assessed the tax on sales of compressed air. The auditor relies upon Title 23 of the Virginia Administrative Code (VAC) 10-210-660, which states that the sale of oxygen is taxable. The auditor also cites Title 23 VAC 10-210-560, which addresses taxable fabrication labor.

The Taxpayer protests the assessment and disputes the application of the cited regulations. The Taxpayer contends the sale of compressed air was not held taxable in the prior audit and cites Public Document (P.D.) 87-158 (6/2/87) in support of its position that it is selling services and not tangible personal property.

DETERMINATION

Title 23 VAC 10-210-660 provides that the "[t]he tax applies to sales of oxygen ...to consumers unless the sales are exempt under 23 VAC 10-210-920 (manufacturers, processors), 23 VAC 10-210-50 (agricultural producers for market) or some other specific ground." Title 23 VAC 10-210-560 A states, "An operation which changes the form or state of tangible personal property is fabrication." Section B provides that "[a] person regularly engaged in the fabrication of tangible personal property for sales at retail must collect and pay the tax on the sales price of the property."

Virginia Code § 58.1-603 imposes the sales tax upon every person who engages in the business of selling at retail or distributing tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines tangible personal property as personal property "which may be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses." Additionally, Title 23 VAC 10-210-660 specifically imposes the retail sales tax on the sale of oxygen.

The Taxpayer is selling air that is filtered and compressed using specialized machinery and put into tanks. By virtue of the process itself, the air used is measured and clearly perceptible to the senses. Therefore, the compressed air in this instance qualifies as tangible personal property. In addition, the auditor classified the process of converting atmospheric air to compressed air as fabrication of tangible personal property. Based on the facts of this case and the cited authorities, the auditor was correct in assessing the sales tax.

The Taxpayer cites P.D. 87-158 to support its position. In that document, the Tax Commissioner concluded that the sale of compressed air by coin operated self-service pumps is exempt of the tax. The ruling explains that the intent of the transaction is the purchase of tire inflation services to ensure the proper functioning and operation of the tire. Its states further that the tangible personal property (compressed air) being sold is inconsequential to the overall purpose of the transaction. What is noteworthy in the ruling is that the Tax Commissioner clearly states that the ruling does not apply to other sales of compressed air or gases such as may be sold in aerosol cans, canisters, tanks , etc. Emphasis added.

Although the Taxpayer's sale of compressed air may involve inspection and replenishment services, obtaining a service is not the true object of the sale at issue. Instead, the true object is the receipt of compressed air that is deemed tangible personal property. Accordingly, the Taxpayer's comparison of the sale of compressed air used in tire inflation services to its sale of compressed air is not persuasive.

In regard to the prior audit, the previous auditor addressed exempt sales, out-of­state sales, government sales, and diving instructions. There is no indication in the previous audit that compressed air sales were reviewed and that any guidance was provided.

Based on the foregoing, the assessment is upheld. The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days from the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections, regulations 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 about this determination, you may contact * at or at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4097107574.M