Document Number
02-154
Tax Type
Retail Sales and Use Tax
Description
Construction materials, exempt government entity
Topic
Computation of Tax
Exemptions
Date Issued
12-13-2002
December 13, 2002


Re: Request for Ruling: Retail Sales and Use Tax


Dear *****:

This is in reply to your letter in which you request a ruling on the application of the sales and use tax to purchases of construction materials by the ***** (the "Authority"). I apologize for the delay in the department's response.
FACTS

The Authority is a regional jail authority and an exempt government entity. The Authority entered into a construction management contract with a contractor ("Contractor") for the construction of a jail facility. The Contractor subsequently entered into subcontracts with a number of subcontractors for the performance of the construction.

You seek a ruling that the Authority is entitled to purchase the construction materials exempt of the tax and then furnish such materials to the subcontractors without the subcontractors incurring the tax. You ask for the ruling in regard to a specific subcontract in which the subcontractor (Subcontractor) is the supplier of the materials it installs. To support your position, you cite an Attorney General Opinion issued to the Authority, 1997 Op. Va. Atty. Gen. 157.
RULING

The subcontract at issue is between the Subcontractor and the Contractor. The Subcontractor agreed to furnish and install a security system in the construction of the jail facility. The security system consisted of specialized doors, electronic locking devices, and other components that become real property upon installation. The Subcontractor, along with a number of other vendors, supplied the materials necessary for the Subcontractor to perform the contract. In bidding the contract, the Subcontractor included the total amount for completing the job, including all materials costs, labor, and the applicable sales and use tax charges.

The subcontract contains a "Special Requirement" that gives the Authority the option to purchase the materials from the suppliers. The summary of the "Special Requirement" states:
    • In connection with this subcontract, [the Authority] reserves the option to enter into an agreement with the Subcontractor to purchase all, or a portion of the tangible personal property necessary for the performance of the Contract, and thereby to save the amount of the sales tax thereon by virtue of the Authority's status as a Tax Exempt institution.

Code of Virginia § 58.1-609.1(4) provides an exemption from the sales and use tax for tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States. The government regulation in Title 23 of the Virginia Administrative Code (VAC) 10-210-690 interprets the exemption and provides that governments are exempt when their purchases are made pursuant to required official purchase orders to be paid out of public funds.

The Authority exercised the above option and issued direct materials purchase orders to the Subcontractor and the other vendors. The Authority's credit was bound in connection with the purchases. Based on the regulation and the subcontract "Special Requirement," the Subcontractor's sale of the materials to the Authority qualifies as an exempt sale to the government.

Further, Code of Virginia § 58.1-610(B) provides an exception to the general rule that contractors are subject to the tax on their purchases of tangible personal property that are installed as realty. Section J of 23 VAC 10-210-410 addresses the exception and states that "[c]ontractors are not subject to the use tax when provided with tangible personal property purchased by a governmental entity for use in real property construction contracts." Based on these authorities, the Subcontractor does not incur the tax when it is furnished materials by the Authority.

The above rulings are consistent with the position taken in the Attorney General Opinion issued to the Authority. The Opinion affirms that the Authority's purchase of materials is exempt in accordance with Code of Virginia § 58.1-609.1(4). In addition, the Opinion provides that the Authority may provide the materials to its subcontractors without the subcontractors incurring the tax in accordance with the exception in Code of Virginia § 58.1-610(B).

I hope the foregoing has responded to your inquiry. The Code of Virginia sections and regulations cited are available online in the Tax Policy Library section of the Department of Taxation’s web site, located at www.tax.state.va.us. If you have additional questions, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

                • Sincerely,


                • Kenneth W. Thorson
                  Tax Commissioner


AR/29286J

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46