Tax Type
Retail Sales and Use Tax
Description
Real Property Construction for an Industrial Development Authority
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
05-25-2000
May 25, 2000
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear****
This is in response to your letter requesting correction of the consumer use tax audit assessment issued to ***** (the "Taxpayer'). I apologize for the delay in responding to your letter. Cited sources are enclosed.
FACTS
The Taxpayer is a real property construction contractor that fabricates and installs automatic sprinkler systems that become part of the realty. An audit for the period December 1994 through September 1997 resulted in the assessment of use tax on untaxed purchases of tangible personal property used or consumed in Virginia jobs.
The Taxpayer takes exception to the use tax assessed on materials consumed in the construction of a sprinkler system for a particular facility in Virginia. The Taxpayer indicates that it served as a subcontractor in a project in which a local Industrial Development Authority ("IDA') served as the general contractor. The Taxpayer maintains that an exemption from the sales and use tax applies to its purchases of materials used or consumed in this project.
DETERMINATION
In Public Document (P.D.) 96-96 (5/21/96), the department stated that its ruling was "not intended to address the authority of the IDA to engage in the activities described.' Thus, if the IDA had the authority to engage as a general contractor, the department stated that the subcontractors would "not be liable for use tax on the materials and equipment furnished by the IDA.' (Emphasis added).
However, two recent developments address the availability of the governmental exemption to purchases by an Industrial Development Authority. First, the Attorney General issued an opinion on January 7, 1999, that a local industrial development authority does not have the express or implied statutory authority to act as a general contractor in the construction of a manufacturing plant in order to enable the manufacturer to construct the plant without payment of the sales and use tax on construction materials. Second, legislation was passed by the 1999 General Assembly to address purchases by the Commonwealth and its political subdivisions. House Bill 1765 (1999 Acts of Assembly, Chapter 471) provides that the exemption for the Commonwealth and its political subdivisions does not apply to tangible personal property they acquire and then transfer to private businesses for their use in a facility or real property improvement to be used by a private entity or for nongovernmental purposes. See Code of Virginia Sec. 58.1-609.1(4).
Of further importance, I would note that P.D. 96-96 plainly states that "purchases made by the subcontractors, rather than by the IDA, in connection with the real property construction contracts will generally be subject to the tax. Only in instances where the credit of the IDA is bound directly and the subcontractor has been officially designated as the purchasing agent for the IDA will such purchases be deemed exempt from the tax.' (Emphasis added).
In the Taxpayer's case, it is my understanding that the Taxpayer did not present an IDA purchase order to its vendors for the purchase of materials to be used in the IDA project. Accordingly, the IDA did not purchase the materials to be furnished to the Taxpayer. Rather, it is my understanding that the Taxpayer made all purchases and paid for the materials out of its own funds. Accordingly, these facts reveal that the IDA's credit was not directly bound to the purchases at issue, and the Taxpayer was the true purchaser of the materials at issue.
Furthermore, it is my understanding that the Taxpayer had contracted to furnish and install a sprinkler system to be affixed to the facility. The Taxpayer's charge for this work is not taxable because the transaction constitutes a real property service transaction. In such instances, the Taxpayer is deemed a real property contractor and is ultimately liable for the sales and use tax based on the cost price of all tangible personal property used or consumed in the performance of the contract. This is in accordance with Code of Virginia Sec. 58.1-610 and Title 23 of the Virginia Administrative Code (VAC) 10-210-410.
Based on the foregoing, the Taxpayer is liable for the consumer use tax assessed in this case. Accordingly, the assessment as issued is proper, due and payable.
Due to the length of time to respond and pursuant to Code of Virginia Sec. 58.1105, I am willing to waive the interest that has accrued on the assessment since July 24, 1999 to present, provided the Taxpayer remits the balance due of ***** within 30 days from the date of this letter. This will save the Taxpayer additional interest charges of *****. If the department does not receive payment within the allotted time, the Taxpayer will be liable for all additional interest charges accrued to present.
Payment should be sent directly to the attention of ***** of the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have a question about this matter, please contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24179R
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear****
This is in response to your letter requesting correction of the consumer use tax audit assessment issued to ***** (the "Taxpayer'). I apologize for the delay in responding to your letter. Cited sources are enclosed.
FACTS
The Taxpayer is a real property construction contractor that fabricates and installs automatic sprinkler systems that become part of the realty. An audit for the period December 1994 through September 1997 resulted in the assessment of use tax on untaxed purchases of tangible personal property used or consumed in Virginia jobs.
The Taxpayer takes exception to the use tax assessed on materials consumed in the construction of a sprinkler system for a particular facility in Virginia. The Taxpayer indicates that it served as a subcontractor in a project in which a local Industrial Development Authority ("IDA') served as the general contractor. The Taxpayer maintains that an exemption from the sales and use tax applies to its purchases of materials used or consumed in this project.
DETERMINATION
In Public Document (P.D.) 96-96 (5/21/96), the department stated that its ruling was "not intended to address the authority of the IDA to engage in the activities described.' Thus, if the IDA had the authority to engage as a general contractor, the department stated that the subcontractors would "not be liable for use tax on the materials and equipment furnished by the IDA.' (Emphasis added).
However, two recent developments address the availability of the governmental exemption to purchases by an Industrial Development Authority. First, the Attorney General issued an opinion on January 7, 1999, that a local industrial development authority does not have the express or implied statutory authority to act as a general contractor in the construction of a manufacturing plant in order to enable the manufacturer to construct the plant without payment of the sales and use tax on construction materials. Second, legislation was passed by the 1999 General Assembly to address purchases by the Commonwealth and its political subdivisions. House Bill 1765 (1999 Acts of Assembly, Chapter 471) provides that the exemption for the Commonwealth and its political subdivisions does not apply to tangible personal property they acquire and then transfer to private businesses for their use in a facility or real property improvement to be used by a private entity or for nongovernmental purposes. See Code of Virginia Sec. 58.1-609.1(4).
Of further importance, I would note that P.D. 96-96 plainly states that "purchases made by the subcontractors, rather than by the IDA, in connection with the real property construction contracts will generally be subject to the tax. Only in instances where the credit of the IDA is bound directly and the subcontractor has been officially designated as the purchasing agent for the IDA will such purchases be deemed exempt from the tax.' (Emphasis added).
In the Taxpayer's case, it is my understanding that the Taxpayer did not present an IDA purchase order to its vendors for the purchase of materials to be used in the IDA project. Accordingly, the IDA did not purchase the materials to be furnished to the Taxpayer. Rather, it is my understanding that the Taxpayer made all purchases and paid for the materials out of its own funds. Accordingly, these facts reveal that the IDA's credit was not directly bound to the purchases at issue, and the Taxpayer was the true purchaser of the materials at issue.
Furthermore, it is my understanding that the Taxpayer had contracted to furnish and install a sprinkler system to be affixed to the facility. The Taxpayer's charge for this work is not taxable because the transaction constitutes a real property service transaction. In such instances, the Taxpayer is deemed a real property contractor and is ultimately liable for the sales and use tax based on the cost price of all tangible personal property used or consumed in the performance of the contract. This is in accordance with Code of Virginia Sec. 58.1-610 and Title 23 of the Virginia Administrative Code (VAC) 10-210-410.
Based on the foregoing, the Taxpayer is liable for the consumer use tax assessed in this case. Accordingly, the assessment as issued is proper, due and payable.
Due to the length of time to respond and pursuant to Code of Virginia Sec. 58.1105, I am willing to waive the interest that has accrued on the assessment since July 24, 1999 to present, provided the Taxpayer remits the balance due of ***** within 30 days from the date of this letter. This will save the Taxpayer additional interest charges of *****. If the department does not receive payment within the allotted time, the Taxpayer will be liable for all additional interest charges accrued to present.
Payment should be sent directly to the attention of ***** of the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have a question about this matter, please contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24179R
Rulings of the Tax Commissioner