Tax Type
Retail Sales and Use Tax
Description
Out-of-state contractor; Lease of equipment; Fabrication
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
04-12-2001
April 12, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period of March 1997 through February 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a general contractor located in Tennessee, performed construction projects in Virginia. The Taxpayer was audited for Virginia sales and use tax compliance and was assessed tax on construction equipment leased from out-of-state companies and brought into Virginia for use on the Virginia projects. The Taxpayer paid the out-of-state sales tax on the equipment at the time the equipment was transferred outside Virginia. The auditor assessed Virginia use tax because the Taxpayer brought the equipment into Virginia for use on a Virginia job.
The auditor also assessed tax on fabrication labor provided by a subcontractor on a Virginia job. The Taxpayer was under contract in Virginia to do site preparation for a construction project. The Taxpayer subcontracted with a third party for the crushing of shot rock severed from the earth at the construction site. The crushed rock was incorporated into the site preparation by the Taxpayer. The auditor assessed the rockcrushing contract as fabrication labor in the audit. The Taxpayer is taking exception to the taxing of this transaction.
DETERMINATION
Lease of Equipment
Code of Virginia § 58.1-604 imposes the use tax on "the use or consumption or tangible personal property in this State . . . ." Title 23 of the Virginia Administrative Code (VAC) 10-210-6030 addresses the Virginia use tax and provides, in part, "the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased."
Code of Virginia § 58.1-611, copy enclosed, allows a credit against the use tax imposed by Virginia for sales or use taxes paid to another state, on property used in Virginia. The credit does not apply to tax erroneously charged or incorrectly paid to another state. The amount of credit is equal to the tax paid to the state in which the property was purchased, but cannot exceed the Virginia use tax imposed on the property.
In the present case, the Taxpayer rented or leased equipment from out-of-state vendors. The Taxpayer took possession of the equipment outside Virginia and paid the sales tax to the vendor in the state where the transaction originated, prior to bringing the equipment to Virginia. According to the auditor and audit supervisor, it is unclear if the Taxpayer paid the tax on the total amount of the lease payments at the time the lease was executed, or whether the tax was being paid on the month-by-month lease payments. If the total tax was properly paid at the inception of the lease to the state in which the Taxpayer took possession of the equipment, the assessed use tax on the lease payments will be removed from the audit. However, if the tax was being paid on a month-by-month basis at the time the lease payments became due, the Virginia use tax will be due for those months in which the equipment was being used in Virginia. This position is supported by Public Document (P.D.) 97-474 (12/10/97), copy enclosed. The auditor will contact the Taxpayer to make the appropriate adjustments to the audit assessment.
Fabrication
With respect to the rock crushing issue, Title 23 VAC 10-210-560, copy enclosed, addresses fabrication and provides, in part, the following:
An operation, which changes the form or state of tangible personal property, is fabrication . . . A person regularly engaged in the fabrication of tangible personal property for sale at retail must collect and pay the tax on the sales price of the property . . . The tax applies to the total charge for the fabrication of tangible personal property on a special order for a consideration, including labor, even if charges for labor are separately stated . . . The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work.
In the present case, the Taxpayer subcontracted with a third party to crush rock at the construction site. Based on the regulation cited above, this activity qualifies as fabrication, as the subcontractor changed the form or state of the severed rock in order for the Taxpayer to utilize the rock in the grading and site preparation process. As a result, the Taxpayer was required to pay tax on the total charge for fabrication of the property. Accordingly, I find that the contract between the Taxpayer and the subcontractor was correctly held taxable in the audit.
The audit will be reviewed and revised in accordance with the above, and a
revised bill will be mailed to the Taxpayer. If you should have any questions concerning
this determination, please contact ****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period of March 1997 through February 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a general contractor located in Tennessee, performed construction projects in Virginia. The Taxpayer was audited for Virginia sales and use tax compliance and was assessed tax on construction equipment leased from out-of-state companies and brought into Virginia for use on the Virginia projects. The Taxpayer paid the out-of-state sales tax on the equipment at the time the equipment was transferred outside Virginia. The auditor assessed Virginia use tax because the Taxpayer brought the equipment into Virginia for use on a Virginia job.
The auditor also assessed tax on fabrication labor provided by a subcontractor on a Virginia job. The Taxpayer was under contract in Virginia to do site preparation for a construction project. The Taxpayer subcontracted with a third party for the crushing of shot rock severed from the earth at the construction site. The crushed rock was incorporated into the site preparation by the Taxpayer. The auditor assessed the rockcrushing contract as fabrication labor in the audit. The Taxpayer is taking exception to the taxing of this transaction.
DETERMINATION
Lease of Equipment
Code of Virginia § 58.1-604 imposes the use tax on "the use or consumption or tangible personal property in this State . . . ." Title 23 of the Virginia Administrative Code (VAC) 10-210-6030 addresses the Virginia use tax and provides, in part, "the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased."
Code of Virginia § 58.1-611, copy enclosed, allows a credit against the use tax imposed by Virginia for sales or use taxes paid to another state, on property used in Virginia. The credit does not apply to tax erroneously charged or incorrectly paid to another state. The amount of credit is equal to the tax paid to the state in which the property was purchased, but cannot exceed the Virginia use tax imposed on the property.
In the present case, the Taxpayer rented or leased equipment from out-of-state vendors. The Taxpayer took possession of the equipment outside Virginia and paid the sales tax to the vendor in the state where the transaction originated, prior to bringing the equipment to Virginia. According to the auditor and audit supervisor, it is unclear if the Taxpayer paid the tax on the total amount of the lease payments at the time the lease was executed, or whether the tax was being paid on the month-by-month lease payments. If the total tax was properly paid at the inception of the lease to the state in which the Taxpayer took possession of the equipment, the assessed use tax on the lease payments will be removed from the audit. However, if the tax was being paid on a month-by-month basis at the time the lease payments became due, the Virginia use tax will be due for those months in which the equipment was being used in Virginia. This position is supported by Public Document (P.D.) 97-474 (12/10/97), copy enclosed. The auditor will contact the Taxpayer to make the appropriate adjustments to the audit assessment.
Fabrication
With respect to the rock crushing issue, Title 23 VAC 10-210-560, copy enclosed, addresses fabrication and provides, in part, the following:
An operation, which changes the form or state of tangible personal property, is fabrication . . . A person regularly engaged in the fabrication of tangible personal property for sale at retail must collect and pay the tax on the sales price of the property . . . The tax applies to the total charge for the fabrication of tangible personal property on a special order for a consideration, including labor, even if charges for labor are separately stated . . . The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work.
In the present case, the Taxpayer subcontracted with a third party to crush rock at the construction site. Based on the regulation cited above, this activity qualifies as fabrication, as the subcontractor changed the form or state of the severed rock in order for the Taxpayer to utilize the rock in the grading and site preparation process. As a result, the Taxpayer was required to pay tax on the total charge for fabrication of the property. Accordingly, I find that the contract between the Taxpayer and the subcontractor was correctly held taxable in the audit.
The audit will be reviewed and revised in accordance with the above, and a
revised bill will be mailed to the Taxpayer. If you should have any questions concerning
this determination, please contact ****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner