Tax Type
Retail Sales and Use Tax
Description
Contractor engaged in concrete construction
Topic
Appropriateness of Audit Methodology
Exemptions
Property Subject to Tax
Date Issued
08-12-2003
August 12, 2003
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period September 1996 through March 2002. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a contractor engaged in concrete construction. An audit resulted in the assessment of tax on purchases of tangible personal property used or consumed by the Taxpayer.
The Taxpayer contests the portion of the audit liability relating to construction materials, tools and equipment purchased or rented for two real property construction projects. I understand that both projects involve work for the Virginia Advanced Shipbuilding and Carrier Integration Center ("VASCIC") via subcontracts with general contractors who contracted with the Industrial Development Authority of the ***** (the "IDA"), a political subdivision of the Commonwealth. The general contractors instructed the Taxpayer to purchase materials tax-exempt based on the governmental exemption of Va. Code § 58.1-609.1(4).
DETERMINATION
Political subdivisions of the Commonwealth
Virginia Code § 58.1-609.1(4) provides an exemption from the retail sales and use tax for tangible personal property for use or consumption by the Commonwealth or any of its political subdivisions and provides, in part, that:
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- this exemption shall not apply to tangible personal property which is acquired by the Commonwealth or any of its political subdivisions and then transferred to private businesses for their use in a facility or real property improvement to be used by a private entity or for nongovernmental purposes other than tangible personal property acquired by the Advanced Shipbuilding and Carrier Integration Center and transferred to a Qualified Shipbuilder . . . [Emphasis added.]
Virginia Code § 9-373 (repealed by Acts 2001, c. 844, effective October 1, 2001) defines the Advanced Shipbuilding and Carrier Integration Center as:
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- a shipbuilding facility which . . . is to be initially owned by a local industrial development authority in Virginia and built and operated by a Qualified Shipbuilder for use by the shipbuilding industry, primarily (i) to perform testing and integration projects, including research and development in conjunction with Virginia universities concerning those projects, and other projects relating to . . . aircraft carriers and (ii) to provide education, training and retraining of workers in the shipbuilding industry.
This same Code section defines a "Qualified Shipbuilder" as "a corporation that (i) is primarily engaged in designing, constructing, overhauling, modernizing, and repairing ships at its facilities in Virginia; [and] (ii) employs more than 10,000 persons at its shipbuilding facilities in Virginia . . . ."
When the cited exemption language from Va. Code § 58.1-609.1(4) is read in conjunction with the definitions cited from Va. Code § 9-373, it is clear that the General Assembly intended to preserve the governmental exemption for a governmental entity's (i.e., the IDA's) purchases of tangible personal property for use in the VASCIC facility (i.e., for use by a private entity - the "Qualified Shipbuilder"). There is nothing in the language to indicate that governmental exemption extends to all purchases, including those made by contractors and subcontractors, related to the VASCIC facility.
Thus, the IDA may purchase tangible personal property exempt of the tax under the governmental exemption and furnish the property to a subcontractor for use in the construction of the VASCIC facility. In such instances, the subcontractor is not liable for the use tax on the construction materials furnished by the IDA. No evidence has been presented, however, that the IDA purchased the contested items directly from suppliers and then furnished them to the Taxpayer.
Real property construction contractors
Pursuant to Va. Code § 58.1-610(A), real property construction contractors are deemed to be the taxable users or consumers of any property used in connection with a contract for real property construction services. Contractors are liable for use tax on property furnished to them by the other party to their contracts if no sales tax was previously paid. An exception to this general rule is set forth in Va. Code § 58.1-610(B) for property furnished to a contractor that would otherwise enjoy one of the governmental exemptions under Va. Code § 58.1-609.1(4). Therefore, contractors are not subject to use tax when provided with tangible personal property purchased by a governmental entity of Virginia, or a political subdivision thereof, for use in real property construction contracts.
Accordingly, Title 23 of the Virginia Administrative Code ("VAC") 10-210-410(J) on government contracts provides generally that the tax applies to all purchases of tangible personal property by contractors for their own use or consumption in connection with real property construction contracts with the government. This regulation provides further that "[o]nly [when] the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax." [Emphasis added.]
The government contracts regulation cited above is consistent with United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff’d, 569 F. 2d 881 (4th Cir. 1978), which upheld the application of the Virginia sales and use tax to purchases made by a government contractor because "the legal incidence of the Virginia sales tax is on the purchaser." Consequently, a contractor purchasing on behalf of one who holds an exemption is not entitled to the same exemption unless the credit of the exempt entity "is bound by the purchasing agreement with the seller."
VASCIC projects
No evidence has been presented that the credit of the IDA was bound directly to the purchases or rentals of construction materials, tools and equipment held taxable in this audit. Furthermore, the provision of an exemption certificate claiming the government exemption without establishing direct payment of those purchases by the governmental entity is not sufficient to bind the credit of the government to the purchases. Accordingly, the Taxpayer is deemed the true purchaser of the contested purchases and is, therefore, liable for the tax on those purchases.
Based on the Department's letter dated June 1, 2000, to one of the Taxpayer's suppliers, you contend that this letter authorizes the Taxpayer to make tax-exempt purchases using the VASCIC exemption via the ST-12 exemption certificate completed by the IDA. That letter, however, references the payment procedures of Public Document 98-13 (01/30/98) that the IDA must use in order for the governmental exemption to apply to those purchases. Those payment procedures are based on the long-established policy set out in 23 VAC 10-210-410(J). Because those required payment procedures were not followed, the IDA did not become the true purchaser of the contested purchases. Rather, the Taxpayer is the true purchaser of the contested materials, tools and equipment.
CONCLUSION
Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter. Please remit your payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn:*********. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulations and the public document cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/42091R
Rulings of the Tax Commissioner