Taxation; Sales Tax; Exemptions; Sand; Dirt

Subject:

Taxation; Sales Tax; Exemptions; Sand; Dirt; G.S. 105-164.13(3)

Requested By:

Mr. Eric L. Gooch Director, Sales & Use Tax Division North Carolina Department of Revenue

Question:

(1)

Where a firm extracts sand and dirt from tracts of land it owns, and sells it from a sales office and stockpile removed from those tracts (along with bark and other kinds of sand and gravel which it buys from others for resale), and the sales of sand and dirt so produced account for about 20% of total sales volume, is the sale of such sand and dirt exempt from sales tax?

(2)

If the sales volume were reversed, would the result be different?

Conclusion:

(1)

No.

(2)

Probably not.

The following factual situation has been stated: A firm has a sales office at which it receives and accepts orders for dirt, fill sand, pine bark, mortar sand, crushed stone, pit gravel and white sand. With the exception of dirt and fill sand, the firm buys and resells all of the above items, and delivers to customers both from stockpiles maintained at the sales office site and from its suppliers’ locations. With regard to its dirt and fill sand, these products are extracted from tracts which the firm both owns and leases, and it delivers these products to its customers both from stockpiles at the office site and from the tracts it owns and leases. During a three year period from 1974 to 1977, sales of dirt and fill sand were approximately $300,000. Sales of other products are about $1,300,000. Thus its own products are about 20% of the total sales.

The question is whether the firm’s sales of dirt and fill sand which it extracts from its land is exempt from sales tax. To answer the question, consideration must be given to G.S. 105-164.13(3), and to two pertinent decisions of our Supreme Court.

G.S. 105-164.13(3) provides an exemption from sales tax for "products of . . . mines when such sales are made by the producers in their original or unmanufactured state". We have previously expressed the opinion that the statute erects three requirements in order for the exemption to apply, plus a fourth established by case law:

1. The product in question must be a product of the mine;

2. in its original or unmanufactured state;

3. and sold by the producer

4. in its capacity of a producer, not as a retail dealer.

41 N.C.A.G. 511.

The same opinion recognizes that sand and crushed stone may be categorized as "products of the mine" in their "original or unmanufactured state", and we believe that dirt readily fits in the same category. When the firm in question extracts its dirt and fill sand from a pit, it clearly is a "producer". The only question is whether, when it sells its dirt and fill sand, it does so in its capacity as a producer, or in its capacity as a retailer. We believe that the latter is the case.

In the leading case in point, Henderson v. Gill, (1948) 229 NC 313, 49 S.E.2d 754, a taxpayer produced flowers on a farm and in a green house, and along with flowers he bought for resale, sold them in his florist shop. He claimed exemption for the flowers he grew, under the portion of

G.S. 105-164.13(3) applicable to "products of farms", but the Supreme Court held that "where the product is produced incidentally as a supply to the main business the right to the exemption is lost." The Court said: "The sale was a transaction carried on by the plaintiffs as retail merchants through a regular place of business devoted to that purpose."

In Duke Power Company v. Clayton, (1968) 274 NC 505, 164 S.E.2d 289, the other side of the coin was before the Court. The producing companies produced coal, and from the mine sold only the coal they produced. The Court said: "In short, they were not operating a retail coal yard and conducting mining operations as a subordinate enterprise which incidentally furnished a portion of their stock in trade."

In the instant situation, the taxpayer seems to fall more clearly in the Henderson v. Gill category. The firm appears to be in the business of selling sand, dirt, gravel and bark at retail and incidentally furnishing some of the dirt and sand it sells. The dollar volume is some indication of that. The maintenance of a regular place of business (sales office and stockpiles) devoted to making retail sales is perhaps even more important.

For example, if the dollar volume were reversed, we are not at all sure that in this case the result would be different, since one of the cases relied on in Henderson v. Gill, supra, discusses this example: "There a farmer was exempt from the law as to sale of his meats or other products of the farm. Though the defendant in that case owned and operated a farm, yet he also owned and operated as a regular business a butcher shop, and the holding was that the meat sold in the butcher shop was not within the exempt class though it came from the butcher’s own farm. The Court observed that this regular business was that of a butcher and the farm an adjunct and largely a convenience to that business and of consequence the defendant did not occupy the farm as a farmer within the meaning of the exemption provision, but as a butcher, saying: "He would occupy it, not as a farmer, but as a butcher, with a view the better to promote his business in that line"." Curry v. Reeves, 240 Ala. 14, 195 So. 428.

Rufus L. Edmisten Attorney General

Myron C. Banks Special Deputy Attorney General