Were lumber and plywood placed in grain containers and equipment used mainly to dredge interstate waterways exempt from Virginia use tax?

Plain-English summary

Virginia removed both the grain-container lumber and the qualifying dredging property from the audit. The taxpayer sold grain, rock, and gravel and performed mechanical dredging. Its use-tax audit included lumber and plywood used with overseas grain shipments and equipment used on dredging projects.

The lumber and plywood did not fit Virginia's definitions of packaging materials or transportation devices. The shipping container itself protected the grain, while the boards mainly helped the foreign customer unload it. Still, the items were nonreturnable and transferred to the customer—some separately invoiced and some included in the grain price—so Virginia treated their cost as exempt resale property.

The dredging exemption applied when dredges and related equipment were used exclusively or principally in interstate or foreign commerce. The project list showed work on major rivers, the Chesapeake Bay, the Intracoastal Waterway, public canals, and military or Coast Guard waterways. Although some private-community projects were treated as non-interstate for the determination, the business principally dredged interstate waterways during the audit period.

Virginia revised the audit and abated the contested bill in full.

What this means for you

• An item can fail the packaging-material definition yet still qualify as property resold to the customer.
• Invoices and contract terms should show that nonreturnable shipping aids become the buyer's property.
• The dredging exemption depends on principal or exclusive use, so keep a project-by-project waterway log.
• Connections to recognized interstate waterways and actual commercial use help establish interstate-commerce status.

Common questions

Q: Were the boards considered packaging?
A: No. Virginia found that the container protected the grain and the boards mainly helped unloading.

Q: Why were the boards still exempt?
A: They were nonreturnable items resold and transferred to the customer.

Q: Did every dredging project count as interstate commerce?
A: No. Private-community waterways without commercial-traffic information were treated as non-interstate for this determination.

Q: Why did the dredging equipment qualify overall?
A: The project evidence showed that the company principally dredged interstate waterways during the audit period.

Citations and references

• Va. Code § 58.1-609.3 4.
• 23 VAC 10-210-400 A.
• 33 CFR § 329.7.

Subject

Untaxed purchases of tangible personal property used or consumed in its business.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-113

Original ruling text

June 26, 2013

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period December 2007 through November 2010. I apologize for the delay in responding to your request.

FACTS

The Taxpayer sells grain, rock and gravel and engages in mechanical dredging. An audit resulted in the assessment of consumer use tax on various untaxed purchases of tangible personal property used or consumed in its business. The Taxpayer takes exception to the tax applied to certain purchases of lumber, plywood and dredging equipment.

DETERMINATION

Lumber

The Taxpayer contests the tax assessed on treated lumber and plywood used in packaging grain in containers for sale and shipment overseas. The Taxpayer indicates that these items prevent the grain from spilling out of the containers during loading and when the container doors are opened at a foreign destination. The lumber is separately invoiced on the customer's invoice, but the plywood is included in the sales price of the grain. The Taxpayer contends that these items are exempt packaging materials and purchased for resale because they become the property of the purchaser. The Taxpayer delivers the containerized grain to the port of embarkation.

Subsection A of Title 23 of the Virginia Administrative Code 10-210-400 defines "packaging materials" as "items which are used to package products for sale and which become the property of the purchaser subsequent to the sale." This regulation provides examples of packaging materials, such as containers, labels, sacks, cans, boxes, drums, and other similar items. The contested lumber and plywood do not constitute a container, label, sack, can, box, drum or other protective wrapper. As such, they cannot be deemed packaging materials.

The same regulation defines "transportation devices" as "items which are used to transport and protect products for sale and to restrain product movement in a single plane of direction." Examples of such devices are "pallets, dunnage, strapping and similar materials used to brace or secure cargo for transport." While the lumber and plywood may brace or secure cargo in a single plane of direction, I find that this usage is not the primary usage of such lumber and plywood.

The lumber and plywood are furnished at the customer's request primarily for the customer's convenience. These items serve no useful purpose in shipping the goods to customers. Rather, the containers in which the goods are loaded serve as the packaging and protect the goods during shipment. Thus, the primary purpose for adding lumber or plywood to one end of a container is to provide an efficient means for offloading the goods at the destination by the customer. As such, the contested items are not primarily intended for use in the transportation of the goods.

Instead, I find that the resale exemption is applicable to the cost price of such items because the contested items are non-returnable and resold to the customers. Accordingly, these contested items will be removed from the audit.

Dredging Equipment

The Taxpayer contends that it conducts dredging operations primarily on interstate waterways and the intercoastal waterway. Such dredging services are provided to federal, state and municipal governments, as well as private companies and individuals. The Taxpayer indicates that commercial, industrial, military and private vessels use these waterways.

The Taxpayer provided a listing of its dredging projects performed during the audit period. A review of such listing indicates that the dredging operations were conducted on or connecting to certain Virginia Beach canals, the Lynnhaven River, the Lafayette River, the Chesapeake Bay, the intercoastal waterway, certain waterways used by a naval base and the U.S. Coast Guard, the James River, and the Elizabeth River. Most, if not all, of these waterways are generally acknowledged as avenues of interstate commerce. 1 Clearly, all of the listed rivers are interstate waterways and any public canals and outlets connecting to such interstate waterways, including the intercoastal waterway, must be considered a part of the navigable waterways potentially used to conduct interstate or foreign commerce.

There are several dredging projects that were conducted for groups of homeowners to deepen a private canal or waterway entrance to their communities. In such instances, it is not clear whether such waterways bear any traffic that could be considered interstate or foreign commerce. Because of the lack of information on the commercial activities of such waterways, I have treated them for this determination as not part of interstate commerce although such waterways may be connected to an interstate waterway.

Virginia Code § 58.1-609.3 4 provides an exemption from the retail sales and use tax for "dredges, their supporting equipment, attendant vessels, and fuel and supplies for use or consumption aboard such vessels, provided the dredges are used exclusively or principally in interstate or foreign commerce."

A review of the dredging contracts and other information provided indicates that the Taxpayer was engaged primarily in dredging interstate waterways during the audit period. As such, the Taxpayer is entitled for this audit period to the exemption cited above for dredges, their supporting equipment, attendant vessels, and fuel and supplies for use or consumption aboard such vessels.

CONCLUSION

The audit will be revised in accordance with this determination, and the contested bill will be abated in full.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5059574640.R

1. “ A waterbody may be entirely within a state, yet still be capable of carrying interstate commerce. This is especially clear when it physically connects with a generally acknowledged avenue of interstate commerce, such as the ocean or one of the Great Lakes, and is yet wholly within one state." § 329.7 of 33 CFR Ch. 11 (7/1/09 Edition).