Was propane used to heat migrant-worker housing exempt as agricultural production, and were movable tobacco-curing barns taxable?

Subject

Migrant-housing propane taxable; movable curing barns exempt

Plain-English summary

Virginia upheld tax on propane used to heat migrant-worker housing because the fuel did not directly plant, raise, harvest, dry, or cure a crop for market. Housing heat, cooking, bathing, rest, and other personal needs remained living expenses even when farmers were legally required to provide compliant housing.

The Department distinguished that use from propane burned in a tobacco-curing barn, where heat directly dries and rehydrates harvested leaves as part of producing the marketable tobacco product.

The ruling separately clarified that the taxpayer's proposed bulk tobacco-curing barns were movable and placed on concrete pads. Applying the fixture factors of annexation, adaptation, and owner intent, the Department treated those barns as tangible personal property rather than real property. A farmer could purchase them exempt by presenting a properly completed ST-18 Agricultural Certificate of Exemption.

What this means for you

• A cost can be necessary to operate a farm without being directly used in agricultural production for market.
• Employee housing utilities were not exempt merely because labor and housing were legally required.
• Fuel used directly to cure a crop is different from fuel used for worker comfort.
• Portable farm structures may remain tangible personal property, but exemption documentation still matters.

Citations and references

• Va. Code § 58.1-609.2 1.
• Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941).
• Transcontinental Gas and Pipe Company v. Prince William County, 210 Va. 550 (1970).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-122

Original ruling text

July 25, 2014

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the audit period March 2010 through February 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a business primarily engaged in the sale of propane to residential and commercial customers. The Taxpayer also sells natural gas and propane related products with or without installation. Additionally, the Taxpayer engages in the sale and installation of tangible personal property in the capacity of a retailer or as a contractor. The Department's audit disclosed that the Taxpayer made untaxed sales and purchases of tangible personal property. The Taxpayer agrees with the Department's assessment with the exception of the application of the tax to propane sales to farmers. The Taxpayer contends the propane is used in agricultural production for market and, therefore, qualifies for exemption from the retail sales and use tax pursuant to Va. Code § 58.1-609.2 1.

DETERMINATION

Agricultural Production

Virginia Code § 58.1-609.2 1 provides an exemption from the retail sales and use tax 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, 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.

The Taxpayer sells to farmers propane that is used to heat housing units provided to migrant workers employed to work the farmers' fields. The Taxpayer contends that federal statutes require that farmers engaging in the employment of migrant farm workers properly pay the workers required pay and benefits as well as supply housing that meets all applicable standards. These standards include housing units and all amenities inclusive of electricity, heating, cooling, cooking and eating, sleeping and other such human needs. The Taxpayer believes that the use of the propane in heating the housing units is no different than propane used in curing tobacco, which is a required part of the process in preparing tobacco for market.

After a tobacco crop is harvested, it must go through a "curing" process to break down unsavory plant compounds and convert leaf starches to sugars. During curing, tobacco leaves are placed in a barn, slowly heated to dry and then re-hydrated. Most traditional curing barns burn propane to raise the barn's temperature. It is the heating process that is crucial for producing a high quality tobacco product.

While I recognize the important function the workers play in agriculture, the propane fuel used in migrant worker housing has no direct bearing on the planting, raising, or harvesting of crops. Once the day's field work has concluded, the migrant worker retires to one of the housing units provided by the farmer. The housing unit is used as a place to eat, bathe, rest and recuperate in order to tend to farming duties the next day. The housing unit may incorporate the propane for purposes of cooking food or for warming the workers, both of which are a part of standards of living that comply with federal and state safety and health standards.

The exemption provided under Va. Code § 58.1-609.2 1 is administered based on agricultural production. While farmers that employ migrant workers are required by federal statutes and regulations to pay and house the workers based on federal and state standards, such requirements do not render tangible personal property used in such endeavors exempt from the Virginia retail sales and use tax. Migrant workers are necessary in many phases of farm work; however, the comfort and personal needs of such workers are not considered to be part of agricultural production of a product for market. Accordingly, the propane used for heating migrant worker housing is not used in agricultural production for market, and I find no basis for adjusting the Department's assessment.

Bulk Tobacco Curing Barns

The Taxpayer also seeks clarification of the Department's classification of bulk tobacco curing barns. The Taxpayer is questioning the Department's regulation that classifies such barns as real property. While the curing barns are not an issue in the current audit, the Taxpayer questions the real property classification when the development of these barns over time has made them more portable and easily movable rather than permanently affixed to realty.

In order to determine whether an article of tangible personal property becomes real property or remains tangible personal property upon installation, the Department relies upon the Virginia Supreme Court's ruling in Danville Holding Corp. v. Clement , 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), which set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation, or remains personal subject to tangible personal property taxation. The three tests are:

(1) the annexation of the chattel (property) to the realty, actual or constructive;

(2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and the intention of the parties, i.e. , the intention of the owner of the chattel to make it a permanent addition to the freehold.

Annexation to the Realty : In order to meet this test, the annexation of the chattel must be actual or constructive. In Danville Holding , the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words, so long as chattel is attached to a building to carry out the purpose for which such building was erected and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building.

Adaptation to use or purpose of the property or realty : Adaptation of chattel to the use of real property to which it is annexed is entitled to great weight. If the attached property is essential to the purposes for which the building is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.

The intention of the parties : The Court has emphasized the intention of the party making the annexation the chief test to be considered in determining whether the chattel has been converted into a fixture. Transcontinental Gas and Pipe Company v. Prince William County , 210 Va. 550, 555 (1970), citing Danville Holding . Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.

The bulk tobacco curing barns that the Taxpayer intends to sell to farmers are movable and are placed on concrete pads. Such barns would be considered tangible personal property and would be exempt of the tax when purchased by a farmer presenting a properly completed ST-18 Agricultural Certificate of Exemption.

CONCLUSION

Based on all of the information presented, the Department's assessment is correct with respect to the propane used in heating migrant worker housing. I find no basis for any adjustment to the Department's assessment or a refund of any portion of the amounts previously paid.

The Code of Virginia sections and other reference documents cited are available on­line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov . If you have any questions regarding this determination, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5488078865.Q