04-158 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax on the contract labor charges to fabricate structural and ornamental steel

Topic

Assessment

Property Subject to Tax

Date Issued

09-30-2004

September 30, 2004

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ******

This will reply to your letters in which you seek correction of the retail sales and use tax assessments issued to ***** (the "Taxpayer") for the period January 2001 through December 2003. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is an out-of-state real property contractor that furnishes and installs custom steel gates, stairs, railings, and fencing for Virginia construction projects. The Taxpayer purchases steel, paint, hardware and miscellaneous items that are furnished to out-of-state subcontractors who fabricate the items to the Taxpayer's specifications. The Taxpayer then has the fabricated items shipped to Virginia job sites where the items are installed.

The Taxpayer was audited and assessed use tax on the contract labor charges to fabricate the structural and ornamental steel used for the Virginia construction contracts. The Taxpayer contends that the subcontract labor is not subject to use tax. The Taxpayer also seeks waiver of the penalty assessed in the audit for failure to file consumer use tax returns for the periods November 2001 and January 2002.

DETERMINATION

Fabrication Labor

The Taxpayer appealed this same issue as a result of a previous audit assessment. In that appeal, the Taxpayer maintained that it operated in a dual role of real property contractor and fabricator. The Taxpayer asserted that the provisions of Title 23 of the Virginia Administrative Code (VAC) 10-210-410(D) applied to its operations. This regulation states that fabrication labor performed by construction contractors exclusively for their use or consumption is not subject to sales and use tax.

The Department addressed the fabrication labor issue in a response to the Taxpayer's previous appeal that was published as Public Document 04-22 (06/02/04). In that response, the Department determined that the Taxpayer is not a fabricator and that Title 23 VAC 10-210-410(D) does not apply to the Taxpayer's business activities. The Taxpayer contracts with other parties to fabricate structural steel into stairs, railings, fencing, and similar items. The Taxpayer does not perform the actual fabrication of these items but installs the finished items as part of real property construction contracts in Virginia. The Taxpayer is deemed to be a using and consuming real property contractor and liable for the sales and use tax on the fabrication labor charges. Accordingly, the auditor correctly assessed use tax on the fabrication labor charges.

The Taxpayer contends the fabricated items have no value until they are installed at the job site, and the items should not be considered tangible personal property. The term "tangible personal property" is defined in Va. Code § 58.1-602 as "property which may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses." Based on this definition, I cannot agree with the Taxpayer that the fabricated steel items are not tangible personal property. In addition, I cannot agree that the items have no value until installed at the job site. The Taxpayer would include the value of the fabricated items in its bids on construction jobs and would include the items as job costs for accounting purposes.

Penalty

The Taxpayer states that consumer use tax returns for the periods November 2001 and January 2002 were prepared and mailed, but the Department has no record of receiving the original returns. The Taxpayer is unable to provide evidence that the returns were mailed timely because the Taxpayer did not use certified or return receipt mail. The Taxpayer explains that it had experienced problems with the mail service during the time the returns were prepared. The Taxpayer also notes that it experienced unusually high turnover in the accounting department during this time.

Title 23 VAC 10-210-2030 addresses penalties and states that the Tax Commissioner may waive penalty if a taxpayer can demonstrate good cause for failing to file or pay the amount of tax due on time. The Taxpayer has not demonstrated that the returns were ever mailed. Furthermore, the Taxpayer failed to file the returns when it became aware of the fact that the Department had not received the returns. The Taxpayer has not shown that good cause exists for failing to file the returns. Therefore, I find no basis to waive the penalty assessed on the delinquent tax liability for the periods November 2001 and January 2002.

Conclusion

Based on the above, the assessments for the periods January 2001 through December 2003 are correct. The combined outstanding balance of ********* should be paid within 30 days from the date of this letter to avoid the accrual of additional interest. Payment may be mailed to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions concerning this determination, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/50226S

Rulings of the Tax Commissioner