Was diesel used by ready-mix trucks exempt from Virginia sales tax after a motor-fuel-tax refund?

Subject

Fuel used directly in the manufacture of products for sale or resale qualifies for the sales tax exemption.

Plain-English summary

A concrete manufacturer operated ready-mix trucks whose diesel engine both propelled the chassis and powered the mixing unit. It received a refund of motor-fuels tax equal to 35% of the fuel used, then was assessed sales tax on that refunded fuel.

Virginia explained that refunded motor fuel becomes subject to sales tax unless another exemption applies. Fuel used directly to manufacture products for sale qualifies under Va. Code § 58.1-609.3(2).

The Department used the 35% ratio in Va. Code § 58.1-2259 B 1 to measure the fuel used for the non-propulsion mixing function. It exempted that fuel as directly used in manufacturing and authorized a refund of the audited sales tax plus interest.

Citations and references

• Va. Code §§ 58.1-609.1(1), 58.1-609.3(2), 58.1-2259 B 1, and 58.1-15.
• 23 VAC 10-210-360.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-48

Original ruling text

April 11, 2016

Re: Protective Claim for Refund: Retail Sales and Use Tax

Dear *:

This will reply to your letter submitted on behalf of your client, * (the "Taxpayer"), in which you seek a refund of sales taxes paid as the result of an audit by the Department for the period of June 2010 through May 2013. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is a manufacturer of ready mix concrete and concrete masonry block. The Taxpayer's primary business activity is the manufacture and sales of concrete and concrete blocks to retail customers. In the performance of its business activity, the Taxpayer owns and operates a fleet of ready mix concrete trucks. The ready mix concrete trucks consist of a manufacturing unit that is comprised of the mixing drum and other equipment that are driven by the same diesel engine that propels the truck chassis.

The Taxpayer purchases all of its diesel fuel inclusive of the motor fuels tax. As authorized under Va. Code § 58.1-2259, the Taxpayer applies for and receives a refund of motor vehicle fuels tax from the Department of Motor Vehicle (the "DMV") in the amount of 35% of the fuel used on ready mix trucks.

The Taxpayer was audited and assessed the retail sales and use tax on diesel fuel for which it had received a motor fuel tax refund. The Taxpayer believes the diesel fuel for which it received a motor fuels tax refund would be exempt from the retail sales and use tax as fuel used directly in its manufacturing process. The Taxpayer requests a refund of the retail sales tax assessed in the audit and paid on the diesel fuel for which it received a motor fuel tax refund.

DETERMINATION

Virginia Code § 58.1-609.1 provides statutory exemptions from the retail sales and use tax for governmental entities and commodities. Subsection 1 of Va. Code § 58.1-609.1 addresses fuels and motor fuels and exempts the following:

Fuels which are subject to the tax imposed by Chapter 22 (§ 58.1-2200 et seq.). Persons who are refunded any such fuels tax shall, however, be subject to the tax imposed by this chapter, unless such taxes would be specifically exempted pursuant to any provision of this section . [Emphasis added].

The above statutory exemption expressly states that upon the refund of the fuel taxes, the motor fuel in question becomes subject to the retail sales and use tax provided such fuel does not enjoy an exemption under the retail sales and use tax exemption statutes. In the present case, Va. Code § 58.1-609.3.2 provides an exemption for industrial manufacturing and processing and specifically provides an exemption for "machinery or tools or repair parts therefor or replacement thereof, fuel , power, energy, or supplies, used directly in processing, manufacturing... products for sale or resale." [Emphasis added].

All of the above clearly establishes the fact that motor fuels not subject to the motor vehicle fuels tax are subject to the retail sales and use tax (unless exempt elsewhere within the retail sales and use tax statute), and fuels used directly in the manufacturing process are exempt.

It must be determined at this point to what extent the industrial manufacturing exemption extends to the diesel fuel used in the Taxpayer's concrete mixer trucks. Title 23 of the Virginia Administrative Code (VAC) 10-210-360 provides the Department's interpretation of the industrial manufacturing exemption as it relates to concrete mixer trucks and provides the following:

A concrete mixing unit mounted on a truck is classified as machinery used directly in manufacturing and such mixing unit may be purchased free of the sales and use tax provided the concrete is produced for sale or resale and not for the manufacturer's own use. The truck itself is not subject to retail sales and use tax provided it is subject to the motor vehicle sales and use tax and this tax has been paid.

The term "mixing unit" is restricted to the rotating mixer and the accessories necessary for connecting it with the motor. Where a separate motor operates the rotating mixer exclusively, such motor is exempt from the sales tax, but where a motor operates the truck and also the rotating mixer, the motor is regarded as part of the truck proper, and repair and replacement parts are not exempt. Repair or replacement parts for the mixing unit itself are exempt; but tires, tubes batteries, oil and all repair or replacement parts for the truck portion of the mixer-truck are taxable.

Based on a reading of Title 23 VAC 10-210-360, the manufacturing exemption clearly extends to separate motors operating mixing units; however, the exemption does not include a truck motor used to propel the truck. This regulation does not address fuel used to power each motor. However, as provided under Va. Code § 58.1-609.3.2 cited above, fuel used directly in the manufacture of products for sale or resale qualifies for the sales tax exemption.

Virginia Code § 58.1-2259 B 1 provides to ready mix truck operators a refund of 35% of fuel taxes paid on fuel used in an engine to propel a ready mix truck, provided such engine is also used to operate the mixing unit. Therefore, for sales and use tax purposes, the sales tax exemption for fuel used to both propel the vehicle and to power the non-propulsion mixing unit will be calculated based on the 35% ratio set out in Va. Code § 58.1-2259 B 1.

Based on all of the above, I find basis to exempt the motor fuel purchases held taxable in the audit from the retail sales and use tax as fuel used directly in the manufacturing process. Accordingly, I have authorized a refund of the tax in the amount of *. The refund will also include interest calculated in accordance with Va. Code § 58.1-15.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5651237665.T