July 6, 2023
Re: Request for Reconsideration: Retail Sales and Use Tax
Dear *****:
This will respond to your letter in which you seek reconsideration of the determination letter, issued as Public Document (PD) 21-36 (10/26/2021), addressed to ***** (the “Taxpayer”) for the period May 2007 through June 2013. I apologize for the delay in responding to your request.
FACTS
The Taxpayer operated a marine cargo terminal and was in the business of providing marine cargo handling services at the Port of Virginia. The Department audited the Taxpayer and assessed use tax on the cost price of ship-to-shore cranes used by the Taxpayer to handle containers in shipping and receiving at the port. In P.D. 21-36, the Department upheld the assessment, denying the Taxpayer’s arguments that the transaction at issue was not taxable because 1) it was an occasional sale pursuant to a reorganization; 2) it was a gift occurring outside of Virginia; and 3) it occurred outside of the statute of limitations for the assessment. While the Department found that the Taxpayer took title to the cranes’ components in international waters outside of the audit period, it did not have taxable use of the cranes until they were erected, tested, and commissioned by the seller, which occurred within the audit period. Because the taxable first use occurred in Virginia within the statute of limitations, and because the transaction didn’t qualify for the exclusion from the tax, the assessment was upheld.
The Taxpayer timely filed a request for reconsideration, alleging the Department relied on inaccurate facts and misapplied policy in its final determination. The Taxpayer asserts the Department erred because 1) any taxable first use of the cranes occurred outside of the audit period, and alternatively, 2) the use tax cannot be applied after installation as the cranes become annexed to the real property. While the Department has already considered the timing of the Taxpayer’s first use of the property, the Taxpayer did not assert, and the Department did not consider, whether the use tax was inapplicable based upon the cranes status as real property rather than tangible personal property during the original administrative appeal in this case.
DETERMINATION
Real v. Tangible Personal Property
In determining real versus tangible personal property, the Department looks to Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E. 2d 345, 349 (1941), the Virginia Supreme Court set forth a three-part test to be used in determining whether an article of tangible personal property becomes real property upon installation. The three tests are: (1) annexation of the chattel 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. 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.
Annexation
Annexation of chattel must be actual or constructive. In Danville Holding, 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.” Id. In other words, so long as chattel is attached to a building or realty to carry out the purpose for which the realty is used 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 realty.
Adaption to use or purpose of the property or realty
If attached property is essential to the purpose 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 realty.
The intention of the parties
The court has emphasized that the intention of the party making the annexation is the chief test to consider 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 the annexation. The intention to make a chattel a permanent accession to the realty must affirmatively and plainly appear.
In this instance, each crane operates on a closed rail system by which the cranes and rail are attached to the realty at the port. The cranes are attached to the realty and their use is clearly adapted to the use of the realty as a port. In regard to the third and chief test, the Taxpayer has provided evidence of its intent to treat the property as realty. All three tests have been met. Additionally, the locality similarly concluded that the cranes were part of the realty for local real estate tax purposes. Based upon the documentation, pictures, and video provided, it appears that the cranes become real property when erected at the port.
Use Tax
The use tax assessed in this audit is applicable to the use or consumption of tangible personal property in Virginia. See Virginia Code § 58.1-604. According to the analysis in P.D. 21-136, the Taxpayer did not make a taxable use of the cranes until they were erected. At that point in time, the cranes were incorporated into the realty and no longer considered tangible personal property subject to the Virginia use tax.
Based on the facts presented, another entity (presumably a contractor) performed the installation of the cranes affixing them to real property. Property installed or incorporated in real property that loses its identity as tangible personal property and becomes real property is deemed to be used or consumed by the contractor. See Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A. Thus, the entity that installed the cranes would have been required to accrue and remit the use tax on the tangible crane components affixed upon installation.
CONCLUSION
Based upon a review of the additional facts and documentation presented, the Taxpayer was not subject to use tax on the cranes. Pursuant to this determination, the audit will be returned to the appropriate field audit staff to remove the use tax assessed on the cranes and abate that portion of the assessment. The auditor will provide the Taxpayer with a revised audit report reflecting the adjustment.
The Code of Virginia sections, regulation, and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****, or via email at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4029-C