Did Virginia's railway common-carrier exemption cover locomotive cab heaters and a voice event recorder?

Plain-English summary

Virginia exempted the locomotive cab heaters but kept the voice event recorder and its repairs taxable. The railway common-carrier exemption covered property used directly in providing transportation, including repair and maintenance items incorporated into the transportation system.

The cab heaters repaired or replaced locomotive heaters and primarily defrosted windshields. Virginia found them indispensable to safe operation and immediately used in transportation, despite also improving employee comfort.

The event recorder stored rail-controller phone and radio communications for later incident investigations and employee-efficiency testing. Those functions could support safe operations, but the device did not itself control trains or act immediately in transportation. Occasional real-time emergency use was incidental to its administrative purpose, so neither the recorder nor its repairs qualified.

Because the paid assessment was reduced by removing the heaters, the Department directed a refund of the overpayment with statutory interest.

What this means for you

• For this exemption, essential or legally required equipment is not automatically direct-use property.
• Identify whether the item acts immediately in transportation or mainly supplies information for later analysis.
• Locomotive repair and replacement parts can qualify when incorporated into the transportation system.
• Mixed-use equipment is evaluated by its actual overall function.

Citations and references

• Va. Code §§ 58.1-609.3(3) and 58.1-1833.
• 23 VAC 10-210-380 and 23 VAC 10-210-382.
• Commonwealth v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973).
• Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973).

Subject

Tax on portable cab heaters, an event recorder, and repairs to the event recorder

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-99

Original ruling text

June 9, 2011

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), as a result of an audit for the period January 2005 through July 2010.

FACTS

The Taxpayer is a common carrier of freight and passengers by rail. An audit resulted in the assessment of consumer use tax on various items of tangible personal property purchased for use or consumption in the Taxpayer's operations.

The Taxpayer takes exception to two types of items assessed in the audit. The Taxpayer contends that the tax should not be assessed on portable cab heaters, an event recorder, and repairs to the event recorder. The Taxpayer maintains that these items are exempt pursuant to the railway common carrier regulation set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-382.

DETERMINATION

Virginia Code § 58.1-609.3 3 provides an exemption from the retail sales and use tax for "tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by railway, for use or consumption by such common carrier directly in the rendition of its public service." Section A of Title 23 VAC 10-210-380 defines "use or consumption directly" as:

those activities that are an integral part of the rendition of common carrier

service by a railway. Items of tangible personal property that are used or

consumed directly in the rendition of common carrier service by a railway are

those that are both indispensable to the actual provision of the transportation

service and use/or consumed immediately in the performance of such

service. The fact that a particular item may be considered essential to the

rendering of such transportation service because its use is required either by

law or practical necessity does not, of itself, mean that the property is used

directly in the rendition of the service . As described in 23 VAC 10-210-382,

items of tangible personal property which are to be incorporated into and will

become a part of a railway's owned or leased transportation system are

deemed to be used directly in the rendition of its public service; however,

tangible personal property used in general and administrative activities and

activities not related to a railway's transportation system are deemed not to

be used directly in the rendition of its public service . The term "use" or

"consumption directly" includes tangible personal property used in the repair

and maintenance of a railway's transportation system to keep it in operation.

[Emphasis added.]

In addition, Virginia courts follow the rule of strict construction regarding exemptions from the retail sales and use tax. This means that taxation is the rule and exemption is the exception. As such, all exemptions from the tax are strictly construed against the one seeking it. See Commonwealth v. Community Motor Bus Co. , 214 Va. 155, 198 S.E.2d 619 (1973). Also see Golden Skillet Corp. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1973). Based on these authorities, I will now address the issues raised in your appeal.

Cab Heaters

The cab heaters were purchased to repair or replace the heaters on locomotives. The Taxpayer contends that the primary operational function of a cab heater is to defrost the windshield of the locomotive. Without a properly, functioning heater, the Taxpayer maintains that the locomotive cannot be safely operated when the windshield is fogging.

Because Title 23 VAC 10-210-382 exempts repair and replacement parts for locomotives and the cab heaters at issue are both indispensable to the actual provision of a safe transportation service and used immediately in the performance of such service, they qualify for the exemption set out in Va. Code § 58.1-609.3, notwithstanding the collateral benefit to employee comfort. Accordingly, the cab heaters will be removed from the audit.

Event Recorder

An event recorder is used to record incoming and outgoing phone and radio transmissions with the rail traffic controller. The voice recordings are stored indefinitely on compact discs in the event of a railroad incident requiring investigation. These recordings are also used to conduct efficiency tests of rail traffic controllers to determine whether proper procedures were followed.

The event recorder at issue is a voice recorder. Based on the information presented, it may be essential to rail incident investigations and employee monitoring that facilitate safe rail transportation services. However, this equipment, including repairs made to such equipment, is not used immediately in the performance of rail transportation services. While the information recorded by this equipment may be used to make operational decisions, such equipment does riot itself initiate such decisions. Rather, the information provided by this equipment enables the Taxpayer's personnel to gather information for future use in analyzing, verifying and testing railway communications. Such activities, however, do not actively ensure the integrity or control of train operations. Furthermore, any use of such equipment in an emergency situation for real time remote communications would appear to be occasional and thus incidental to its overall administrative use. For these reasons, I find that the purchase of such recorder, and the repairs to it, do not qualify for the exemption in Va. Code § 58.1-609.3 3.

CONCLUSION

The assessment will be revised in accordance with this determination. Because the contested assessment is paid in full, a refund of the overpaid amount will be issued as soon as practical along with interest owed on such overpayment amount in accordance with Va. Code § 58.1-1833.

The Code of Virginia section and regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4666023502.R