Tax Type
Retail Sales and Use Tax
Description
Using and consuming contractor/ sale and installation of cabinets
Topic
Accounting Periods and Methods
Date Issued
11-08-2004
November 8, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *************:
This is in reply to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** (the "Taxpayer") for the period May 1998 through April 2001. I apologize for the unusual delay in responding to your letter.
FACTS
The Taxpayer is a manufacturer of kitchen cabinets and maintains four production facilities in Virginia. The component parts of the cabinets are manufactured at three of the facilities and the cabinets are assembled at the fourth facility. The Taxpayer has historically treated itself as a retailer and sells cabinets at wholesale to dealers and at retail to end-users within and outside of Virginia. The Taxpayer frequently installs the cabinets sold to end-user customers.
As a result of the Department's audit, the auditors concluded that the Taxpayer is a using and consuming contractor with respect to contracts requiring the sale and installation of the cabinets. In accordance with the contractor regulation in Title 23 of the Virginia Administrative Code (VAC) 10-210-410 E, the auditors believe that the Taxpayer must apply the tax to the fabricated costs of the cabinets used in such contracts. The auditors propose to treat the Taxpayer as a contractor on a prospective basis.
The Taxpayer disagrees with the auditors' interpretation of the regulation and disputes the proposed application of the tax. In addition, the Taxpayer protests the tax assessed to spray booths and contends that they qualify as certified pollution control equipment exempt from taxation pursuant to Va. Code § 58.1-609.3 9. In the alternative, the Taxpayer contends that the spray booths qualify for the industrial manufacturing exemption in Va. Code § 58.1-609.3 2.
DETERMINATION
Contractor v. Retailer
Virginia Code § 58.1-610 D provides an exception to the general contractor rule and states:
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- Any person selling fences, Venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items, shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items. [Emphasis added.]
For purposes of the exception to the general contractor rule, a retailer is defined in Title 23 VAC 10-210-410 G as "any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items."
At issue is the auditors' position that the Taxpayer does not meet the three-prong test set out above. It is not disputed that the Taxpayer maintains an inventory and performs installation in Virginia. At issue is whether the Taxpayer maintains a retail or wholesale place of business at its cabinet assembly location. The Taxpayer contends that it does maintain a wholesale place of business at this location where it displays kitchen layouts to showcase its products for dealers. In addition, training and tours are frequently held at this location for the wholesale customers, primarily dealers and builders, to familiarize them and their employees with the Taxpayer's product lines. The auditors do not agree because the location is a production facility located in a small industrial park that is not open to the general public and not conducive to making sales to retail customers.
To resolve this issue, I find that the prior ruling of the Tax Commissioner in Public Document (P.D.) 97-156 (3/31/97) is on point. In that instance, a cabinet manufacturer maintained a showroom at its business location in Virginia for purposes of displaying products. The taxpayer contended that it was not a retailer because the purpose of its place of business was to provide builders' customers with a design center to choose a kitchen or bathroom layout for installation in new home construction and not for the purposes of soliciting retail sales from the general public. The Tax Commissioner determined that the taxpayer was a retailer and stated, "the regulation does not speak to the type of customer served at the place of business. Instead, the regulation merely requires the existence of a retail or wholesale place of business."
Based on the ruling in P.D. 97-156 and the facts presented, I find that the Taxpayer in this instance satisfies the three-prong test in Title 23 VAC 10-210-410 G. Therefore, the Taxpayer is deemed to be a retailer with respect to its contracts for the sale and installation of cabinets.
Spray Booths
Virginia Code § 58.1-609.3 9 provides an exemption from the sales and use tax for "[c]ertified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section . . . . " The Taxpayer has not provided documentation to verify that the spray booths have been certified by the Virginia Department of Environmental Quality. Therefore, I cannot agree that the exemption applies in this instance.
Virginia Code § 58.1-609.3 2 (iii) provides an exemption from the sales and use tax for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale . . . " [Emphasis added.] The term "used directly" is defined in Va. Code § 58.1-602 as "those activities which are an integral part of the production of a product . . . but not including ancillary activities such as general maintenance or administration."
Further, in the case of Commonwealth of Virginia v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court held that the use of the word "directly" in the statute was intended to narrow the scope of the exemption. An exemption, therefore, applies only when an item is indispensable to actual production and is primarily used or consumed immediately in the actual production of products. This standard established by the Court can also be found in Title 23 VAC 10-210-920, the regulation regarding manufacturing: "Items of tangible personal property which are used directly in manufacturing and processing are machinery, tools and repair parts therefor, fuel, power, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process." [Emphasis added.]
The Taxpayer's spray booths are used during the application of stain and other finishes to the cabinet products. The booths consist of plastic or glass panels surrounding paint nozzles. As the cabinet panels move through the conveyor, the stain or other finish is applied to the panel by the nozzles. The panels of the booth prevent the stain or other finish substances from splattering.
It is evident that the spray booths are used in the Taxpayer's production process, as they provide an area to apply stain and other finishes to the cabinet panels. The paint nozzles are used directly in the manufacturing process, as they apply a component part (stain or other finish) to the cabinets during the production process. However, unlike the nozzles, the booth panels do not play a direct role in the actual production of the cabinets and do not qualify for the exemption.
The spray booth panels, in this instance, are different from the items found exempt in the prior rulings of the Tax Commissioner in Public Documents 88-284 (10/26/88), 93-135 (6/4/93) and 95-129 (5/19/95) cited by the Taxpayer. In each of the rulings, the exempt items were found to directly contribute to the integrity of the product similar to the paint nozzles in this instance.
Conclusion
The Taxpayer should treat itself as a retailer with respect to contracts requiring the sale and installation of the cabinets. In addition, the tax assessed on the paint nozzles will be removed from the audit. The tax assessed on the spray booth panels is upheld. The Taxpayer will receive an updated bill shortly that should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available online in the Tax Policy Library section of the Department of Taxation website located at www.tax.state.va.us. If you have questions regarding this determination, you may contact ***** in the Office of Policy Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
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AR/41831J
Rulings of the Tax Commissioner