Were chemicals used directly to purify, disinfect, stabilize, and protect water sold by a Virginia utility exempt from sales and use tax?

Subject

Application of tax to chemicals used in the water treatment process.

Plain-English summary

All of the water-treatment chemicals listed by the utility appeared exempt from Virginia sales and use tax as materials used directly in industrial processing. The utility collected, treated, tested, and distributed water for sale to public and private customers.

Virginia treated water-treatment facilities as industrial processors. Chemicals qualified when they directly purified or disinfected water, controlled pH or hardness, prevented corrosion or contaminant leaching, stopped microorganism growth, aided filtration, or remained in the finished water sold.

The ruling classified every listed product as exempt, including aluminum sulfate, caustic soda, chlorine, fluoride compounds, ammonia, activated carbon, permanganates, phosphates, hypochlorites, oxygen, acids, lime, soda ash, sodium chloride, and related treatment inputs.

The classification did not automatically establish a refund amount. The utility sought only use tax it had remitted directly to the Department, not sales tax paid to vendors. Virginia referred the schedules to its Compliance Unit to verify how the chemicals were actually used and whether the records supported the claimed amounts before issuing any warranted refund.

What this means for you

• A water utility can qualify as an industrial processor of water sold to customers.
• A chemical may qualify even if much of it is later removed as sludge, when it directly performs a treatment function.
• Exempt status depends on actual use, not merely the product name.
• Refund claims still require transaction records and verification of tax paid.

Common questions

Did the ruling exempt only chemicals that remained in the finished water?

No. It also exempted chemicals removed during filtration or as waste sludge after directly serving a treatment purpose.

Was the utility guaranteed the full refund it requested?

No. The Compliance Unit still had to verify actual use and supporting documentation.

Did the refund request include sales tax paid to vendors?

No. The utility requested refunds only for use tax remitted to the Department.

Citations and references

• 23 VAC 10-210-920.
• Virginia Public Document 87-155 (June 2, 1987).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-198

Original ruling text

August 31, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This reply is in response to your letter submitted on behalf of the * (the "Taxpayer"), in which you request a ruling regarding the application of the retail sales and use tax to chemicals used in the water treatment process. For all chemical purchases that are determined to be exempt from the sales and use tax, the Taxpayer requests a refund of use taxes paid to the Department. I apologize for the delay in responding your inquiry.

FACTS

The Taxpayer is a publicly held water service utility that collects, treats, tests and distributes water for public and private use. The Taxpayer presents a list of chemical purchases for determination of their taxable status based on their described use in the treatment process. Although requesting a refund of use tax remitted, the Taxpayer is not requesting a refund of sales taxes it may have paid to its vendors for the purchase of any chemical product found to be exempt of sales and use tax.

RULING

Title 23 of the Virginia Administrative Code 10-210-920 states that the sales and use tax does not apply to tangible personal property of they following type when it is used or consumed by an industrial processor of products for resale:

1.Industrial materials for future manufacturing or processing into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product;

2. Industrial materials that are coated upon or impregnated into the product at any stage or its manufacture or processing;

The regulation goes on to define processors as:

establishments engaged in the treatment of materials, substances or other products in such manner as to render the products more useful or marketable. Products need not undergo a change in state or form in order for an establishment to be classified as an industrial processor.

In Public Document (P.D.) 87-155 (06/02/87), the Tax Commissioner ruled that water treatment facilities are industrial processors and that machinery, tools, supplies, etc. used directly in the processing of water for sale or resale qualify for exemption from the retail sales and use tax. Chemical additives used to guarantee the integrity of water that is sold to either residential or business customers are treated as exempt property used directly in industrial processing. As the water is being processed, chemicals are used to eliminate toxic or unwanted substances from the product or remain as an integral part of the final product for sale.

Based on the foregoing and the Taxpayer's descriptions, the chemicals listed below appear to be used directly in the water treatment process and/or guarantee the integrity of the product and touch directly on the production process.

1 . Aluminum Sulfate - Used in the water purification process. The major portion of the molecular constituents thereof remain in the water that is sold - Exempt

2. Caustic Soda (Sodium Hydroxide) - Used to control pH and alkalinity of the water. Its constituents remain in the water that is sole - Exempt

3. Zinc Orthophosphate - Used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

4 . Chlorine - Used for primary disinfection purposes. Its constituents remain in the water that is sold - Exempt

5 . Hydrofluosilic Acid (Fluoride) - Added to water to help prevent dental decay. Its constituents remain in the water that is sold - Exempt

6. Non-Ionic Polymer - Used as an aid to both flocculation and filtration processes. It constituents remain in the water that is sold - Exempt

7. Potassium Permanganate - Used as a pre-filtration oxidant to prevent the growth of microorganisms that can contaminate potable water. Most of the chemical is removed as part of waste sludge after serving its purpose - Exempt

8. Sodium Permanganate - Used as pre-filtration oxidant to prevent the growth of microorganisms that contaminate potable water. Most of the chemical is removed as part of the waste sludge after serving its purpose - Exempt

9. Powdered Activated Carbon - Used in the disinfection process. Its constituents remain in the water that is sold - Exempt

10. Anhydrous Ammonia - Used in the disinfection process, It constituents remain in the water that is sold - Exempt

11. 10% Aqueous Ammonia (Aqua Ammonia ) - Used as pre-filtration oxidant to prevent the growth of microorganisms that can contaminate potable water. Most of the chemical is removed via the filtration process - Exempt

12. Calcium Sequestrant - Used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

13. Ferric Chloride - Used in the water purification process. The major portion of the molecular constituents thereof remain in the water that is sold - Exempt

14. Ferric Sulfate - Used in the water purification process. The major portion of the molecular constituents thereof remain in the water that is sold - Exempt

15. Polyaluminum Chloride - used in the water purification process. The major portion of the molecular constituents thereof remain in the water that is sold -Exempt

16. Polyaluminum Sulfate Blend - Used in the water purification process. The major portion of the molecular constituents thereof remain in the water that is sold - Exempt

17. Sodium Aluminate - Used in the water purification process. The major portion of the molecular constituents thereof remain in the water that is sold - Exempt

18. Orhto-Poly Phosphate Blend - used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

19. Phosphoric Acid (Orthophosphate) - Used to control pH of water. Its constituents remain in the water that is sold - Exempt

20. Sodium Hexametaphosphate - Used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

21. Sodium Silicate - Used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

22. Tetrapotassium Pyrophosate - Used as a pre-filtration oxidant to prevent the growth of microorganisms that can contaminate potable water. Most of the chemical is removed as part of the waste sludge - Exempt

23. Zinc Polyphosphate - Used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

24. Sodium Zinc Metaphosphate - Used to prevent corrosion of supply and distribution lines and the leaching of contaminants such as lead and copper into the water. Its constituents remain in the water that is sold - Exempt

25. Calcium Hypochlorite - Used for primary disinfection purposes. Its constituents remain in the water that is sold - Exempt

26. Carbon Dioxide - Used to control hardness of the water and prevent loss of ammonia feed, which is used in the disinfection process to treat contaminants. Its constituents remain in the water that is sold - Exempt

27. HTH - Used for primary disinfection purposes. Its constituents remain in the water that is sold - Exempt

28. Hydrogen Peroxide - Used as pre-filtration oxidant to prevent the growth of microorganisms that can contaminate potable water. Most of the chemical is removed as part of the waste sludge after serving its purpose - Exempt

29. Sodium Hypochlorite - Used for primary disinfection purposes. Its constituents remain in the water that is sold - Exempt

30. Sodium Fluoride - Added to the water, to prevent decay. It constituents remain in the water that is sold - Exempt

31. Liquid Oxygen - Used for primary disinfection purposes. Its constituents remain in the water that is sold - Exempt

32. Citric Acid - Used in the water for purification process. The major portion of the molecular constituents thereof remain in the water that is sold - Exempt

33. Hydrated Lime - Used to control pH and alkalinity of water. Its constituents remain in the water- Exempt

34. Hydrochloric Acid - Used to control pH and alkalinity of the water. Its constituents remain in the water that is sold - Exempt

35. Soda Ash - Used to control pH and alkalinity of water. Its constituents remain in the water that is sold - Exempt

36. Pebble Lime - Used to control pH and alkalinity of the water. Its constituents remain in the water that is sold - Exempt

37. Sodium Bicarbonate - Used to control pH and alkalinity of the water. Its constituents remain in the water that is sold - Exempt

38. Sulfuric Acid - Used to control pH and alkalinity of the water. Its constituents remain in the water that is sold - Exempt

39. Sodium Chloride - Used to control hardness of the water and prevent loss of ammonia feed, which is used in the disinfection process to treat contaminants. Its constituents remain in the water that is sold - Exempt

The Taxpayer presents a detailed schedule of use tax remitted to the Department for the purchases of the above chemicals. Because these amounts have not been verified, this matter will be referred to the Department's Compliance Unit. The audit staff will verify the manner in which the chemicals are used in the water treatment process and the supporting documentation that has been submitted by the Taxpayer. Following the audit staff's review, the Department will issue the appropriate refund as warranted.

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

If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings at ****.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-3534200910.M