Tax Type
Retail Sales and Use Tax
Description
Construction; Construction contractors engaged in manufacturing.
Topic
Taxability of Persons and Transactions
Date Issued
10-30-1997
October 30, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**********
In your letter of September 23, 1997, you seek correction of the sales and use tax audit assessment issued to******* (the Taxpayer).
FACTS
The Taxpayer is engaged as an electrical service contractor and a retail dealer of tangible personal property. An audit for the period April 1994 through March 1997 resulted in an assessment of use tax on purchases used or consumed in the performance of service contracts or used by the Taxpayer in operating its business. The audit also resulted in an assessment of sales tax on a taxable but untaxed sale.
The Taxpayer takes exception to the use tax assessed on items purchased in connection with its real property service contracts in which the customer was a federal, state or local government entity. The Taxpayer maintains that it accepted exemption certificates in good faith from such customers and therefore no tax should be assessed in connection with such transactions. The Taxpayer also takes exception to the use tax assessed on purchases of certain computer software and a flowmeter. The Taxpayer maintains that it did not use or consume these items and is presently holding them in its exempt resale inventory.
DETERMINATION
General Rules for Real Property Contracts
Whenever it contracts to furnish and install tangible personal property, which loses its identity as tangible personal property and becomes a permanent fixture of realty upon installation, the Taxpayer is deemed to have purchased such property for its use or consumption and is generally liable for the tax on such purchases. See Title 23 of the Virginia Administrative Code (VAC) 10-210-410(A), copy enclosed.
Furthermore, it makes no difference that purchases of tangible personal property by the Taxpayer are for use in connection with real property construction contracts with a Virginia or federal government agency or with a locality of Virginia. Generally, such purchases constitute taxable sales to the Taxpayer for its own use or consumption. The tax applies to purchases of tangible personal property used in the performance of a service contract with a government agency, regardless of whether title to the property passes directly to the governmental entity upon purchase by the Taxpayer or if the Taxpayer is reimbursed directly by the government entity for the cost of the property. See 23 VAC 10-210-410(J).
An exemption certificate furnished by a government entity only applies to the government's purchases of tangible personal property; it has no bearing on a contractor's purchases of tangible personal property used or consumed in the performance of an exempt real property services contract. This is because the service contractor is deemed to be the final user or consumer of the property. Unfortunately in this case, no exemption certificate offered to the Taxpayer for making the purchases at issue is acceptable because of the nature of the contract.
Exceptions for Real Property Contracts
There are few exceptions to the above general rules. One exception is when the credit of a governmental entity is bound directly to the purchase and the contractor has been officially designated as the purchasing agent for such governmental entity. In this case, however, no evidence has been presented to demonstrate that the credit of the government was directly bound to the purchases at issue and that the Taxpayer officially served as the purchasing agent on behalf of the government.
Another exception which allows a contractor to purchase items exempt of the tax is the exemption for certified pollution control equipment and facilities. Qualifying property must be certified by the state certifying authority [i.e., the Department of Environmental Quality (DEQ)] to qualify for exemption. See 23 VAC 10-210-2090, copy enclosed.
In this case, the Taxpayer has not furnished sufficient evidence that the purchases at issue were certified by DEQ as meeting the criteria for the certified pollution control exemption. I would note that the Form ST-11A exemption certificate submitted by a contractor to the Taxpayer on May 5, 1992, states that the pollution control project was certified on November 7, 1990, and was to be completed by June 30, 1992. Since the current audit period begins with April 1994, and the ST-11A shows that the project was completed well before the audit period, such exemption certificate has no bearing on the current audit period.
It is longstanding policy that no contractor is allowed to use another contractor's exemption certificate. Although the Taxpayer may contract to furnish and install pollution control equipment and devices for the same project as another contractor, the Taxpayer must obtain its own certification from DEQ and must request the ST-11A exemption certificate from the Department of Taxation in order for a valid exemption to apply to the Taxpayer's purchases of equipment, materials and devices for use or consumption in a certified pollution control project. See 23 VAC 10-210-280(E), copy enclosed.
If DEQ certification is not obtained before making purchases of pollution control equipment and materials, a contractor must pay the tax on its purchases in a timely manner. In order for a refund or credit to apply, the DEQ certification must be obtained within three years from the date such taxes became due and payable. Otherwise, the Taxpayer cannot obtain a refund or credit of the taxes paid or abatement of tax assessed on pollution control equipment and materials.
Based on all of the foregoing, and absent certification from DEQ that the purchases at issue qualify for the above exception, I find no basis at this time to remove such purchases from the department's audit. If the Taxpayer does obtain the proper certification, the Taxpayer should furnish a copy of the DEQ certification, a copy of the letter submitted by the Taxpayer to DEQ in seeking the pollution control certification, and a listing of all of the materials and equipment relating to such certification, to the department's District Office so that the proper adjustments can be made to the audit.
Computer Software
Although the Taxpayer claims that the computer software at issue is being held in the Taxpayer's resale inventory, it is my understanding that this software has been booked as a depreciable asset and included on the Taxpayer's depreciation schedule and federal Form 4562. This action demonstrates that the Taxpayer has not strictly treated this property as resale inventory but has made beneficial use of the software in reducing its income tax liabilities. Although the Taxpayer is required to collect the sales tax when the software is sold at retail, I must conclude that the Taxpayer has made a taxable use or consumption of the software and is therefore liable for the use tax on the cost price of the computer software.
Flowmeter
The Taxpayer maintains that it purchased the flowmeter at issue In August 1995 for a specific job. According to the Taxpayer, the flowmeter was not used on that job and is currently in its resale inventory. I will agree to allow this item to be removed from the department's audit. However, if the Taxpayer should make a taxable use of the flowmeter at some future time, the Taxpayer will be liable for the use tax on its cost price.
Conclusion
The requested information should be furnished to the department's**** District Office for revision of the audit. Since the assessment has been paid, an audit revision which removes any of the purchases from the audit would result in a tax refund to the Taxpayer.
If you have any questions about the requested information or the audit revision, please contact **** , Audit Supervisor of the department's **** District Office, at ****. If you have any questions about the content of this letter, please contact **** of the department's Office of Tax Policy at ***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13028R
Rulings of the Tax Commissioner