April 26, 2023
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a refund of consumer use tax paid by ***** (the “Taxpayer”) as a result of an audit for the period of April 2015 through March 2018. I apologize for the delay in responding to your correspondence. The issues of this case are a matter of changing policy in Virginia with regard to real property contractors’ provision of certain tangible personal property. A law change to resolve these issues became effective July 1, 2017 and will be explained later in this letter.
FACTS
During the audit period, the Taxpayer, an operator of a chain of convenience stores with several locations in Virginia, purchased custom cabinets, including installation, from ***** (Vendor A) for several of its stores. The Department‘s auditor applied the retailer exception to the general contractor rule and concluded that Vendor A operated as a retailer with respect to the sale of cabinets to the Taxpayer. Vendor A, is a Pennsylvania based contractor, did not collect the Virginia sales tax on the sale of the cabinets, and the Taxpayer did not accrue and remit Virginia use tax to the Department, on such purchases. Based on this, the auditor assessed use tax to the Taxpayer on untaxed cabinet purchases occurring prior to July 1, 2017.
The assessment has been paid, and the Taxpayer contends it is not subject to the use tax because the sales tax should have been assessed against Vendor A, considered a retailer by the auditor. The Taxpayer also contests the tax assessed on purchases of custom cabinets from another vendor, ***** (Vendor B).
DETERMINATION
Contractor or Retailer Designation
Generally, real property contractors must comply with Virginia Code § 58.1-610 A, which sets out the following rule:
Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax.
During the audit period, Virginia Code § 58.1-610 D, provided an exception to the above general contractor rule that stated:
Tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section. Any person selling fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items, shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items.
For purposes of the above exception, a retailer is defined in Title 23 Virginia Administrative Code 10-210-410 G as follows:
[A]ny person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items. As so defined, a retailer is not classified as a using or consuming contractor with respect to installations of the aforementioned items. A retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt from tax.
Out-of-State Contractors and Virginia Jobs – Vendor A
The Department has previously issued a public document that is instructive in this case. Public Document (P.D.) 14-43 (3/21/2014) addressed the activities of a commercial interior finishing contractor located in Tennessee. The contractor did not maintain a location or inventory in Virginia, but did perform contracting jobs in Virginia. The contracting jobs included the provision of items included in the contractor exception rule. The Tax Commissioner ruled that the contractor did not meet the three prongs of the retailer test and therefore could not be deemed a retailer in Virginia and would, therefore, be subject to the use tax on all tangible personal property used or consumed in performing the contracting jobs in Virginia. Because the contractor was located in Tennessee and received all tangible personal property used in performing the Virginia contracting jobs in Tennessee, that state was deemed to have the first right of taxation of such property. In order to avoid the payment of use tax on property received in Tennessee and used in Virginia, the contractor was instructed that a credit for Virginia use tax due on the property used in Virginia contracting jobs would apply.
The fact pattern in P.D. 14-43 is similar to that of Vendor A in that it maintained a build and fabricate facility in Pennsylvania where it produced custom cabinetry and shelving, and installed such cabinets and shelving for its commercial customers. Vendor A ordered materials for each job/contract and was required, as a contractor, to pay sales or use tax to Pennsylvania on raw material purchases. When Vendor A performed the job at issue in Virginia, it ordered and received the materials and supplies for the job at its Pennsylvania location. Vendor A then transported the property to the Virginia jobsite. Because Vendor A is a contractor with respect to real property in Pennsylvania, the first right of taxation of tangible personal property used by Vendor A in a Virginia job occurred in Pennsylvania, essentially similar to the Tennessee contractor in P.D. 14-43.
Contractors who perform real property jobs in Virginia are required to pay the tax on purchases of tangible personal property used, consumed, or otherwise provided in accordance with Virginia Code § 58.1-610 A. In order for contractors to satisfy the use tax requirement to Virginia while also paying the sales or use tax required by another taxing authority, Virginia Code § 58.1-611 provides a reciprocal credit as follows:
A credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state. The amount of the credit shall be equal to the tax paid by him to another state or political subdivision thereof by reason of the imposition of a similar tax on his purchase or use of the property. The amount of the credit shall not exceed the tax imposed by this chapter.
During the period of the audit, Pennsylvania’s general sales and use tax rate was 6% and Virginia’s tax rate was either 5.3% or 6% depending on the location of the job. In applying the credit, no additional Virginia use tax would be due on the property consumed in the performance of the Virginia job for the Taxpayer by Vendor A. Therefore, because no additional Virginia sales or use tax is due, the Taxpayer’s purchases of custom cabinets from Vendor A will be removed from the audit.
Vendor B Assessment
The Taxpayer contests the use tax on the purchase of custom cabinets from ***** (Vendor B). A review of the audit indicates that cabinet purchases from Vendor B were not included in the audit liability.
Law Change
The 2017 Virginia General Assembly enacted House Bill 1890 and Senate Bill 1308 (2017 Acts of Assembly, Chapters 436 and 449), which removed the language from Virginia Code § 58.1-610 D that treated sellers of specified items as retailers rather than consuming contractors, regardless of whether such items were installed or fabricated by the seller. The change was effective July 1, 2017. See Virginia Tax Bulletin 17-8, published as P.D. 17-139 (6/29/2017), which discusses the law change in detail.
CONCLUSION
The determination in this instance is consistent with P.D. 14-43. The audit will be returned to the appropriate audit staff for adjustment in accordance with this determination. In addition, a refund of the tax and interest assessed and paid regarding the contested purchases from Vendor A will be refunded as soon as practicable. Interest owed on such overpayment will be included in accordance with Virginia Code § 58.1-1833 A.
To resolve this matter, the Taxpayer submitted an offer in compromise. In accordance with the determination, it is not necessary to consider the offer settlement.
The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1977.J