Rulings of the Tax Commissioner

May 5, 2022

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

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) requesting a ruling on the application of the retail sales and use tax to materials and services provided by the Taxpayer. I apologize for the delay in responding to your correspondence.  

FACTS

The Taxpayer designs and installs wireless communication systems that enhance radio signal strength within buildings in Virginia. The Taxpayer requests a ruling regarding the application of Virginia’s retail sales and use tax to several common transactions between the Taxpayer and its clients. Each issue will be addressed separately.

RULING

Question 1: Sometimes customers provide sales tax exemption certificates, other times we conduct a direct sale of the installed system. What is the tax application to these transactions?

Pursuant to Virginia Code § 58.1-612, the Taxpayer is considered a “dealer” if it, among other things, sells or offers to sell tangible personal property in Virginia. Any dealer deemed to have sufficient business activity in Virginia, pursuant to Virginia Code § 58.1-612 C or D, is required to register with Department, file returns, and collect and pay over any tax due. See Title 23 VAC 10-210-480.  For purposes of this ruling request, the Department assumes the Taxpayer qualifies as a dealer under the statute.

Virginia Code § 58.1-623 provides:

A. All sales or leases are subject to the tax, until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter…

B. The certificate mentioned in this section shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable. Such certificate shall be signed by and bear the name and address of the taxpayer; shall indicate the number of the certificate of registration, if any, issued to the taxpayer; shall indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored under a blanket exemption certificate; and shall be substantially in such form as the Tax Commissioner may prescribe…

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 further explains, 

A. All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice…

B. Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.

Accordingly, the Taxpayer does not have an obligation to collect and remit sales tax when it receives an acceptable resale exemption certificate from a customer. The Taxpayer should take necessary precautions to ensure that exemption certificates always bear the required information and are applicable to the tangible personal property being purchased. The Taxpayer is required to keep and preserve records of its taxable and nontaxable sales, including exemption and resale certificates, necessary to determine its proper tax liability for at least three years. See Virginia Code § 58.1-633 and Title 23 VAC 10-210-470.

Question 2: If a customer provides an exemption certificate, are we still subject to use tax on purchases.  

Virginia’s retail sales and use tax work together to ensure consistent application of a general tax on retail (or final) sales of tangible personal property. The only necessity for the use tax provisions is to include within the sales tax those sales transactions for property which occur outside of the state but are to be used within the state by the purchaser. See United States v. Forst, 442 F.Supp. 920 (1977). 

As outlined in response to Question 1, if the Taxpayer is provided a complete exemption certificate and accepts it in good faith, the items for resale can be sold exempt of the sales tax. The Taxpayer would not be responsible for the remittance of tax to the Department when the sale is for resale with a valid exemption certificate on file for the transaction.  

It is unclear what purchases the Taxpayer is referencing or why such purchases would be subject to use tax. The Taxpayer would be subject to use tax on purchases of tangible personal property that are for the Taxpayer’s own use or consumption, not for resale to customers, for which Virginia sales tax was not charged, or not charged correctly, on the purchase.  

Question 3: Bi-directional amplifiers can be removed by the client, rendering the system nonoperational, while the wiring remains in the building. Are these components considered real property improvements or tangible personal property? 

Bi-directional amplifiers are signal boosters that sustain two-way communication throughout a building for either enhanced cellular signal strength or enhanced two-way radio communication. The removal of the amplifier renders the system non-operational.  In order to determine whether the amplifier and its wiring are real property improvements or tangible personal property, a three-prong test must be utilized.  

In Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941), the Virginia Supreme Court set forth three general rules to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation, or remains personal property subject to taxation as business tangible personal property. The three tests are: (1) the annexation of the chattel (property) to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the parties, i.e., the intention of the owner of the chattel to make it a permanent addition to the freehold.  See Id. at 232.

In order for the rules to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration." Id at 232. In addition, the Court stated that each fixture case must be decided according to its particular facts and circumstances.

Annexation to the Realty 

In order to meet this test, the annexation of chattel must be actual or constructive.  In Danville Holding at 232, the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words: so long as chattel is attached to a building to carry out the purpose for which such building was erected, and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building.

Adaptation to use or purpose of the property or realty

If attached property is essential to the purposes for which the building (or realty) is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.

The intention of the parties 

The Court has emphasized the intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture. Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.

The intention to make a chattel a permanent accession to the realty must affirmatively and plainly appear. If the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel. Mullins v. Sturgill, 192 Va. 653 (1951).

The intent of the improvement is to enhance signal strength throughout the building for the occupant. While the amplifiers are wired into buildings by the Taxpayer, they are components designed to be removable in the instance of the occupant’s relocation. Based on this description, the amplifiers do not appear to be affirmatively and plainly annexed to the realty and would not be deemed a permanent accession to the realty and would remain tangible personal property upon installation. 

Question 4: Is shipping taxable and to whom?

Virginia Code § 58.1-609.5 3 states that the retail sales and use tax does not apply to “transportation charges separately stated.” Title 23 VAC 10-210-6000 A states:
 
The tax does not apply to transportation or delivery charges added to a taxable sale provided such transportation charges are separately stated on the invoice to the customer. If the transportation or delivery charges are not separately stated on the invoice, they will become part of the sales price of the property and will be subject to the tax.
 
Title 23 VAC 10-210-6000 B states that: 
 
As used in this section the terms “transportation” and “delivery charges” mean charges for delivery from the seller to the purchaser, commonly known as “transportation-out,” and include postage or common carrier charges.  Transportation and delivery charges do not include charges from a manufacturer to a retailer's place of business relative to purchases for resale, nor do they include handling charges.

Therefore, shipping charges are not subject to tax if separately stated. The Department’s longstanding policy is that amounts charged for shipping become taxable when combined in one lump sum with other taxable charges, including charges for handling. The charge for sales tax is made to the purchaser but is required to be collected and remitted from the seller. As such, under long-settled principles of sales and use tax law, the Department may seek payment of the tax from either party.

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. 

The Code of Virginia sections and regulations cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this ruling, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****, or via email at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1664.C