Document Number
04-187
Tax Type
Retail Sales and Use Tax
Description
Tax on the cost price of materials used in performing real property services.
Topic
Appropriateness of Audit Methodology
Date Issued
10-08-2004


October 8, 2004



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

Dear ***********:

This is in reply to a letter submitted on behalf of your client, ***** (the "Taxpayer"), seeking correction of the Department's retail sales and use tax audit assessment for the period November 1996 through December 2002. I apologize for the delay in the Department's response.
FACTS

The Taxpayer enters into contracts with the Commonwealth of Virginia and its political subdivisions for wet and dry chemicals. The Taxpayer purchases the chemicals from suppliers located outside Virginia. Under the terms of some contracts, the Taxpayer sells the chemicals directly to a governmental entity for its use. In other contracts, the Taxpayer sells and applies the chemicals to roads for the governmental entities.

In most instances, the Taxpayer is in competition with its suppliers for government contracts. If the suppliers are awarded a contract for the delivery of the chemicals, the suppliers usually subcontract the delivery to the Taxpayer. In other instances, when the contract calls for the delivery and application of the chemicals, the suppliers will also subcontract out the application to the Taxpayer.

An audit by the Department resulted in the assessment of tax on chemicals used in contracts requiring the Taxpayer to furnish and apply the chemicals to road surfaces. The Taxpayer disagrees with the assessment.
DETERMINATION

Contractors

Virginia Code § 58.1-610 A provides that any person who contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate and furnishes tangible personal property, "shall be deemed to have purchased such tangible personal property for use or consumption." Virginia Code § 58.1-610 B further states:
    • Any person who contracts to perform services in this Commonwealth and is furnished tangible personal property for use under the contract by the person, or his agent or representative, for whom the contract is performed, and a sales or use tax has not been paid to this Commonwealth by the person supplying the tangible personal property, shall be deemed to be the consumer of the tangible personal property so used, and shall pay a use tax based on the fair market value of the tangible personal property so used, irrespective of whether or not any right, title or interest in the tangible personal property becomes vested in the contractor.

Accordingly, in accordance with Va. Code § 58.1-610 A, when the Taxpayer contracts with a governmental entity for both the delivery and application of the chemicals, the Taxpayer is acting in the capacity of a contractor because it is providing a service with respect to real estate. Consequently, the Taxpayer is liable for the tax on the cost price of the materials used in performing real property services.

Similarly, under Va. Code § 58.1-610 B, when the Taxpayer acts as a subcontractor for its supplier, who is under contract with a governmental entity, the Taxpayer is liable for the use tax on the market value of the materials when directed by the prime contractor (i.e., the Taxpayer's supplier) to deliver and apply the chemicals.

Fair Market Value of Chemicals

To determine the fair market value of the chemicals provided by the Taxpayer's suppliers, the auditor used an average per gallon amount based on what the Taxpayer was actually paying for the chemicals. The Taxpayer believes the figures used by the auditor may include the cost charged by the Taxpayer to its customer, rather than the Taxpayer's cost to purchase; however, no documentation has been provided to substantiate this claim. If the Taxpayer can provide additional information showing the auditor's valuation is in error and the actual fair market value of the chemicals at issue, I will allow for an adjustment to the audit assessment.

Public Document (P.D.) 01-17 (03/13/2001)

The Taxpayer contends that P.D. 01-17, cited by the auditor to support the assessment, addresses a variety of services provided under a contract and is distinguishable from the Taxpayer's situation. I disagree. In P.D. 01-17, the taxpayer entered into a contract with the Commonwealth for the application of pesticides and herbicides. The taxpayer purchased the pesticides and herbicides and applied them for the state highway departments. The Tax Commissioner ruled that the contract was for the provision of services, and the taxpayer was the taxable user and consumer of all items purchased in providing the contracted purposes.

The Taxpayer's situation is similar. In the contracts provided by the Taxpayer, which are representative of the contracts that are the subject of this appeal, the Taxpayer contracts to furnish and apply its product on various roadways. The contract's scope of work provides that the Taxpayer shall furnish the product as well as furnish adequate labor and application equipment to properly apply the product to selected road surfaces. The Taxpayer is a contractor with respect to real estate and, therefore, is the user and consumer of all materials consumed in the performance of that contract. Accordingly, I do not find the Taxpayer's argument persuasive.

Conclusion

Based on this determination, the assessment is correct. The Taxpayer will be allowed 30 days from the date of this letter to provide documentation relating to the fair market value of the chemicals. The documentation should be sent to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261­7203, Attention: *****.

If the additional information is not furnished within the allotted time, an updated bill with interest accrued to date will be mailed to the Taxpayer. Please be advised that failure to submit full payment within 30 days from the date of the bill may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty. Please see the enclosure entitled "Important Payment Information."

If you have any questions regarding this determination, please contact ***** at *****@tax.state.va.us or at *****.
                • Sincerely,


                • Kenneth W. Thorson
                  Tax Commissioner




AR/48105Q


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46