Did Virginia's industrial-processing exemption cover a waste collector's bins, trucks, and equipment used to sort and bale recyclable paper and metal?

Subject

Waste collection and recycling equipment did not qualify

Plain-English summary

Virginia denied the industrial manufacturing and processing exemption for the waste collector's bins, trucks, and recycling equipment on the facts presented. Waste collection and disposal were service activities, so the company was the taxable consumer of property used to provide them.

The recycling operation sorted paper and metal, removed foreign material, sized it, and baled it to customer specifications. But the ruling found that the same grade or category entered and left the process, with no demonstrated treatment making the product more useful or marketable.

The company therefore had to pay sales tax to vendors or remit consumer use tax on untaxed purchases. Virginia said it would revisit the recycling issue if the company supplied additional information showing a qualifying marketability-enhancing process.

What this means for you

• Waste hauling and collection equipment used in a service operation is taxable to the provider rather than exempt manufacturing property.
• Sorting, sizing, and baling alone did not establish industrial processing here.
• A recycling exemption claim needs evidence of a treatment that makes the output more useful or marketable.
• If a vendor does not collect tax on taxable bins, trucks, or equipment, the purchaser must address Virginia consumer use tax.

Citations and references

• Va. Code § 58.1-609.3.2; 23 VAC 10-210-920 B, 10-210-4040, and 10-210-6030.
• Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-153

Original ruling text

August 28, 2014

Re: Request for Ruling: Retail Sales and Use Tax Dear

This will reply to your correspondence in which you request a ruling on behalf of your client (the "Taxpayer") regarding the application of the retail sales and use tax to its refuse collection and recycling business. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is in the waste collection business and recycles paper and metal waste products that it collects. The Taxpayer uses trucks with lifts to collect waste from both residential and commercial customers. The residential waste is collected from curbside bins that are furnished to residential customers by the Taxpayer. Commercial waste is collected from front-end load bins, also furnished to customers by the Taxpayer. All waste materials are returned to the Taxpayer's recycling site where it is weighed and distributed to the appropriate recycling area at the site.

Prior to being processed, the waste material is sorted based on the type of material and delivered to the appropriate processing equipment. At this point, the waste is loaded onto the recycling systems that include both manual and automated sorting. The waste is sorted to remove any foreign materials and sized by type in order to meet customer specifications prior to baling. Once sorted, sized and baled to customer specifications, the recycled materials are shipped to customers.

The Taxpayer requests a ruling on the sales tax application to the residential bins, the front-end load bins, trucks and recycling equipment with respect to the industrial manufacturing and processing exemption set forth in Va. Code § 58.1-609.3.

RULING

Virginia Code § 58.1-609.3.2 provides an exemption from the retail sales and use tax for machinery and equipment, tools, supplies, etc., used directly in the production of products for sale or resale by industrial processors. The term "processing" was defined by the Virginia Supreme Court in Commonwealth v. Orange-Madison Cooperative, 220 Va. 655, 261 S.E.2d 532 (1980) as requiring that a product undergo a treatment rendering it more marketable or useful. The term "industrial processing" is defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-920 B to include establishments engaged in the treatment of materials, substances, or other products in such a manner as to render such products more useful or marketable. This section goes on to provide that, as a general rule, the Department looks to the Standard Industrial Classification (SIC) Manual published by the U.S. Department of Commerce to determine those industries that qualify as "industrial manufacturers or processors." Industrial processors and manufacturers include those industries included in, but not limited to, SIC codes 10 through 14 and 20 through 39.

The SIC Manual has since been replaced with the North American Industrial Classification System (NAICS) Manual, most recently updated in 2012, which is now used by the Department to determine those industries that qualify as industrial processors or manufacturers. Both the SIC and NAICS manuals assign industrial classifications according to the primary business activity of the business. Unless the primary business activity is a manufacturing activity in accordance with these classifications, the Department does not consider the business activity to be industrial in nature. As such, the business is not entitled to the manufacturing or processing exemption.

A review of the NAICS Manual shows that the Taxpayer's operation is most similar to businesses classified under 562111, Solid Waste Collection, and 562920 Material Recovery Facilities. These classifications fall under the general classification 562, Waste Management and Remediation Services. Section 562111 includes industries primarily engaged in collecting and/or hauling mixed recyclable materials within a locality. Section 562920 includes industries primarily engaged in operating facilities where commingled recyclable materials, such as paper, plastics, used beverage cans, and metals, are sorted into distinct categories. Under the NAICS, such industries must be classified under Sectors 31 through 33, Manufacturing, to be considered industrial manufacturers or processors for purposes of qualifying for the manufacturing and processing sales tax exemption.

Waste Disposal Service

Based on the above, the Taxpayer's waste collection and disposal services are not an industrial manufacturing or processing activity. Rather, the Taxpayer is providing a waste disposal service to customers. As the provider of a service, the Taxpayer is the taxable user and consumer of all tangible personal used in providing waste disposal services and is required to pay the sales tax to its vendors on all purchases. As such, the Taxpayer is the taxable user and consumer of residential bins purchased for use by residential customers and the front-end load bins purchased for use by commercial customers. In addition, the trucks and related equipment used to collect and transport residential and commercial waste do not qualify for exemption.

If a vendor does not charge and collect the sales or use tax on purchases used for waste collection and transportation, then the Taxpayer must remit the consumer use tax on its purchases directly to the Department using Form ST-7, Virginia Business Consumer's Use Tax Return. See Title 23 VAC §§ 10-210-4040 and 10-210-6030.

Recycling Operation

With regard to the Taxpayer's recycling operation, based on the information provided and the statutory requirements found under Va. Code § 58.1-609.3.2 to qualify as an industrial manufacturer or processor, it does not appear that the recycled materials undergo any type of treatment to make the product more marketable or useful. The same grade or category of paper or metal that goes into the recycling process is the same grade of paper or metal that is baled and ready for sale. For this reason, I find that the Taxpayer's recycling operation does not enjoy the industrial manufacturing or processing exemption set forth in Va. Code § 58.1-609.3 2.

My decision in this instance is consistent with the prior rulings of the Tax Commissioner in Public Documents 87-46 (2/26/87), 94-160 (5/20/94), 94-166 (5/24/94) and 96-305 (10/25/96). However, if the Taxpayer can provide additional information demonstrating that the recycled material undergoes some process that makes it more marketable for the Taxpayer or useful to the customer, I will revisit this issue.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. Form ST-7 is also available on the web site by accessing the Forms link on the homepage. If you have any questions concerning this ruling, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5458461218.S