Tax Type
Retail Sales and Use Tax
Description
Government subcontractors; Purchases by jail facilities
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
12-04-1997
The Honorable Thomas G. Baker Jr.
Member, House of Delegates
You present a hypothetical situation and ask whether the sales and use tax is applicable to materials purchased for and used in the construction of a regional jail.
You relate that a regional jail authority has entered into a construction management contract with a contractor for the construction of a jail. You state that the contractor is the designated construction manager and acts as a reviewing agent for the regional jail authority over the subcontractor's requisitions for materials, etc. You further state that, upon the construction manager's approval of the requisitions, the regional jail authority will purchase the tangible personal property necessary for the performance of the contract by issuing purchase orders to the material suppliers and vendors who then will invoice the jail authority directly. You also provide that, upon confirmation by the construction manager of the delivery of materials to the subcontractors, the regional jail authority will make payment of the invoices directly to the material suppliers. You note that only the credit of the jail authority is bound in connection with any of these purchases.
Article 3.1, Chapter 3 of Title 53.1, §§ 53.1-95.2 through 53.1-95.24 of the Code of Virginia, governs the manner in which two or more political subdivisions may create a jail authority and the powers such authority may possess. § 53.1-95.17 provides that the general purpose of a jail authority is "that of acquiring, constructing, equipping, maintaining, and operating a jail or jail farm.' Pursuant to § 53.1-95.19, a jail authority is "eligible to receive state reimbursement for jail construction.'
The general rule in the Commonwealth is that sales tax is imposed on every person who sells at retail or distributes tangible personal property in the Commonwealth.1 Use tax is imposed on the use or consumption of tangible personal property in the Commonwealth,2 provided, however, that such transactions are not subject to the sales tax provisions.3 Exemptions from sales and use taxes are set forth in §§ 58.1-609.1 through 58.1-609.10, and in § 58.1-609.13. The determining factor pertaining to the applicability of such taxes will be whether a particular acquisition or use falls within one of the specific exemptions created by the General Assembly.4
The exemption from sales and use taxation provided in § 58.1-609.1(4) is applicable to "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.' Generally, "[s]ales to the Commonwealth or its political subdivisions, are exempt from the [sales] tax if the purchases are pursuant to required official purchase orders to be paid out of public funds.'5 Alternatively, in instances where the credit of the governmental entity is bound directly and a contractor has been officially designated as the purchasing agent for such governmental entity, such purchases will be deemed exempt from the tax.6
In the hypothetical situation you present, the regional jail authority issues the purchase orders to the material suppliers and issues payment directly to the suppliers. By furnishing the materials to the subcontractors, the jail authority "is making 'use' of the property; it is exercising a right or power over the property incident to its ownership.'7 Accordingly, I am of the opinion that such purchases fall within the scope of the sales tax exemption in § 58.1-609.1(4)for tangible personal property used or consumed by a political subdivision of the Commonwealth.8
With respect to use tax, contractors generally are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract and are liable for use tax on property furnished by the other party to their contracts, on which no sales tax was previously paid.9 An exception to the general rule, however, is provided in § 58.1-610(B) for property furnished to a contractor that would otherwise enjoy one of the governmental exemptions under § 58.1-609.1(4). Thus, "[c]ontractors are not subject to the use tax when provided with tangible personal property purchased by a governmental entity for use in real property construction contracts.'10 In the hypothetical situation you present, therefore, the subcontractors will not be liable for use tax on the materials furnished by the regional jail authority.
Based on the above, it is my opinion that purchases of tangible personal property for real property construction contracts with the Commonwealth, or a political subdivision thereof, are exempt from sales tax provided that the purchases are made by the governmental entity pursuant to required official purchase orders and paid for out of public funds.11 Furthermore, it is my opinion that contractors are not subject to the use tax when provided with tangible personal property purchased by a governmental entity for use in real property construction contracts.
1 Section 58.1-603.
2 Section 58.1-604.
3 Section 58.1-604(3).
4 See 1996 Op. Va. Att'y Gen. 72, 74.
5 23 VAC 10-210-690(A) (Law. Co-op. 1996).
6 See id. 10-210-410(J).
7 See Va. Tax Rep. (CCH) 202-849, at 14,013 (April 12, 1995).
8 Compare 1991 Va. Att'y Gen. 263, 268
9 See 23 VAC 10-210-410(J), supra note 5.
10 Id.
11 Alternatively, where the credit of the regional jail authority is bound directly and a subcontractor has been officially designated as the purchasing agent for the authority, such purchases will be exempt from sales and use tax. Id. 10-210-410(A), (J).
Attorney General's Opinion