Tax Type
Retail Sales and Use Tax
Description
Kitchen cabinet fabricator; Fabrication for installation or for resale at wholesale level
Topic
Exemptions
Property Subject to Tax
Date Issued
05-15-2001
May 15, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter of February 7, 2001, in which you seek correction of the retail sales and use tax audit assessment of your client, (the "Taxpayer"), for the period of July 1997 through June 2000.
FACTS
The Taxpayer is a fabricator of kitchen cabinets. The Taxpayer fabricates and installs cabinets, fabricates cabinets for sale at the wholesale level, and fabricates cabinets used for display purposes at retail outlets. The preponderance of the Taxpayer's business activities consists of fabrication of cabinets sold through thirdparty retail outlets. The Taxpayer does not maintain an inventory of finished cabinets. The Taxpayer does maintain an order center in Virginia where it receives orders for wholesale purchases by contractors. The Taxpayer maintains an inventory that consists of raw materials and cabinet components, and the cabinets are fabricated on a job-by-job basis.
The Taxpayer was audited in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-410. E,
copy enclosed, and assessed tax on the fabricated cost price of cabinets installed and cabinets furnished to retailers for use as display units. The Taxpayer accrued use tax on the cost price of raw materials withdrawn from inventory and not the fabricated cost of the cabinets. The Taxpayer states that it operated in this manner based on information provided to them on two separate occasions by the Department of Taxation. The Taxpayer believes it properly accrued and remitted use tax on the raw material cost of items withdrawn from its inventory and is seeking correction of the audit assessment.
DETERMINATION
Based on the information provided, the Taxpayer does not have a showroom and does not make retail sales. Therefore, the Taxpayer cannot be classified as a retailer/installer as provided in Title 23 VAC 10-210-410.G, as it does not satisfy all three criteria set forth in the regulation to be deemed a "retailer". The facts presented indicate that the Taxpayer operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its own use and consumption in the performance of real property construction contracts. This being the case, the department looks to Title 23 VAC 10-210-410.E to determine the sales and use tax application to the Taxpayer's operation.
Title 23 VAC 10-210-410.E provides that a person who principally fabricates tangible personal property for his own use or consumption in real property construction contracts is classified as a using and consuming contractor and must pay the tax on the cost price of the raw materials that make up the fabricated property. On the other hand, a person who principally fabricates tangible personal property for sale or resale may purchase raw materials, component parts and other tangible personal property to be fabricated for sale under a resale exemption certificate. If such property is withdrawn from inventory for use and consumption in the performance of real property construction contracts, tax is due "based on the fabricated cost price of the tangible personal property withdrawn." (Emphasis added).
In the present case, the Taxpayer maintains an inventory of raw materials and cabinet components, not an inventory of finished cabinets. At the time the Taxpayer makes withdrawals from inventory, the tangible personal property withdrawn consists of raw materials (cabinet components). Therefore, pursuant to Title 23 VAC 10-210-410.E., tax is due on the cost price of the cabinet components, not on the cost price of the finished cabinets.
I would note that the auditor was unable to determine during the audit process the Taxpayer's principal business activity. However, based on the above and a review of the audit report, it is clear that the assessment of tax based on the fabricated cost price of the finished cabinets is erroneous. If the Taxpayer is principally fabricating tangible personal property for sale or resale, the Taxpayer properly accrued the use tax on the raw materials at the time such materials were withdrawn from inventory. This position is supported by Public Document (P.D.) 94-96 (3/31/94) and P.D. 94-144 (5/9/94), copies enclosed. This tax application would also apply to display cabinets fabricated by the Taxpayer and furnished to retailers free of charge. If the Taxpayer is principally fabricating for its own use or consumption in real property construction contracts, tax is due at the time of purchase on the cost price of the raw materials that make up the fabricated property.
The audit will be returned to the **** District Office for revision in accordance with the above determination. I would like to point out that, since the Taxpayer has more than one location in Virginia, analysis of the business operations of each location would be used to determine the proper tax application in accordance with Title 23 VAC 10-210-410 [see P.D 98-75 (4/23/98) enclosed]. If you should have any questions, 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 of February 7, 2001, in which you seek correction of the retail sales and use tax audit assessment of your client, (the "Taxpayer"), for the period of July 1997 through June 2000.
FACTS
The Taxpayer is a fabricator of kitchen cabinets. The Taxpayer fabricates and installs cabinets, fabricates cabinets for sale at the wholesale level, and fabricates cabinets used for display purposes at retail outlets. The preponderance of the Taxpayer's business activities consists of fabrication of cabinets sold through thirdparty retail outlets. The Taxpayer does not maintain an inventory of finished cabinets. The Taxpayer does maintain an order center in Virginia where it receives orders for wholesale purchases by contractors. The Taxpayer maintains an inventory that consists of raw materials and cabinet components, and the cabinets are fabricated on a job-by-job basis.
The Taxpayer was audited in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-410. E,
copy enclosed, and assessed tax on the fabricated cost price of cabinets installed and cabinets furnished to retailers for use as display units. The Taxpayer accrued use tax on the cost price of raw materials withdrawn from inventory and not the fabricated cost of the cabinets. The Taxpayer states that it operated in this manner based on information provided to them on two separate occasions by the Department of Taxation. The Taxpayer believes it properly accrued and remitted use tax on the raw material cost of items withdrawn from its inventory and is seeking correction of the audit assessment. DETERMINATION
Based on the information provided, the Taxpayer does not have a showroom and does not make retail sales. Therefore, the Taxpayer cannot be classified as a retailer/installer as provided in Title 23 VAC 10-210-410.G, as it does not satisfy all three criteria set forth in the regulation to be deemed a "retailer". The facts presented indicate that the Taxpayer operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its own use and consumption in the performance of real property construction contracts. This being the case, the department looks to Title 23 VAC 10-210-410.E to determine the sales and use tax application to the Taxpayer's operation.
Title 23 VAC 10-210-410.E provides that a person who principally fabricates tangible personal property for his own use or consumption in real property construction contracts is classified as a using and consuming contractor and must pay the tax on the cost price of the raw materials that make up the fabricated property. On the other hand, a person who principally fabricates tangible personal property for sale or resale may purchase raw materials, component parts and other tangible personal property to be fabricated for sale under a resale exemption certificate. If such property is withdrawn from inventory for use and consumption in the performance of real property construction contracts, tax is due "based on the fabricated cost price of the tangible personal property withdrawn." (Emphasis added).
In the present case, the Taxpayer maintains an inventory of raw materials and cabinet components, not an inventory of finished cabinets. At the time the Taxpayer makes withdrawals from inventory, the tangible personal property withdrawn consists of raw materials (cabinet components). Therefore, pursuant to Title 23 VAC 10-210-410.E., tax is due on the cost price of the cabinet components, not on the cost price of the finished cabinets.
I would note that the auditor was unable to determine during the audit process the Taxpayer's principal business activity. However, based on the above and a review of the audit report, it is clear that the assessment of tax based on the fabricated cost price of the finished cabinets is erroneous. If the Taxpayer is principally fabricating tangible personal property for sale or resale, the Taxpayer properly accrued the use tax on the raw materials at the time such materials were withdrawn from inventory. This position is supported by Public Document (P.D.) 94-96 (3/31/94) and P.D. 94-144 (5/9/94), copies enclosed. This tax application would also apply to display cabinets fabricated by the Taxpayer and furnished to retailers free of charge. If the Taxpayer is principally fabricating for its own use or consumption in real property construction contracts, tax is due at the time of purchase on the cost price of the raw materials that make up the fabricated property.
The audit will be returned to the **** District Office for revision in accordance with the above determination. I would like to point out that, since the Taxpayer has more than one location in Virginia, analysis of the business operations of each location would be used to determine the proper tax application in accordance with Title 23 VAC 10-210-410 [see P.D 98-75 (4/23/98) enclosed]. If you should have any questions, please contact ****, Office of Tax Policy, at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner