Tax Type
Retail Sales and Use Tax
Description
Tax on purchases for use in the performance of real property construction contracts
Topic
Assessment
Taxable Transactions
Date Issued
11-23-2004
November 23, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer") for the period August 2000 through July 2003. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a construction contractor that was audited and assessed use tax on various purchases made for use in the performance of real property construction contracts. The Taxpayer is contesting the use tax assessed on charges by an out-of--state landscape contractor (the "Contractor") for site development and landscaping services billed under a subcontract with the Taxpayer. This particular contract was a full-service contract that included the provision and installation of topsoil, trees, shrubs, plants and ground covers. The contract also included the removal of existing vegetation, preparation of planting areas, the installation of sod, seeding, the provision and installation of an irrigation system, the drilling of wells, installation of a pump station, site excavation, backfill, and soil compaction, removal of rock, debris hauling off-site, site grading, and dewatering of the site.
The Taxpayer maintains that the Contractor should be treated as a real property contractor with respect to all of the tangible personal property provided under the contract's scope of work. In support of this contention, the Taxpayer states that the contract was a full-service contract that affects the permanent character of the real property. The Taxpayer suggests that the Contractor's activities go beyond the activities of ordinary nurserymen and points out that the Contractor is licensed as a real property contractor by various licensing bodies. Thus, the correct application of sales and use tax to the Contractor's activities would be that of a real property contractor, not a retailer. This treatment would make the Contractor liable for the sales and use tax on all materials and supplies used to perform the contract work.
The Department treated the Contractor as a retailer of the trees, shrubs and plants provided under the contract. The Taxpayer was held liable for use tax on the trees, shrubs and plants sold and installed by the Contractor. The Contractor had accrued and paid use tax to the Department on the cost price of the trees, shrubs and plants so a credit for the tax paid by the Contractor was allowed in the Taxpayer's audit. In the event the Department does not agree that the Taxpayer is not liable for the use tax on this transaction, the Taxpayer maintains that the transaction should be removed from the audit sample and taxed as a separate item.
DETERMINATION
Retailer vs. Contractor
Title 23 of the Virginia Administrative Code (VAC) 10-210-610 sets out the application of the retail sales and use tax to nurserymen and landscape contractors. The regulation specifically provides that the furnishing and transplanting of trees, shrubs, and plants is a taxable retail sale, and not the provision of services with respect to real estate. Title 23 VAC 10-210-610 B states:
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- When a nurseryman, florist or other person makes retail sales of shrubbery and similar items, and as a part of the transaction agrees to transplant them on the land of the purchaser for a lump sum, the tax applies to the total charge. The tax does not apply to the charge for transplanting if the charge is separately stated on the invoice. [Emphasis added.]
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- Title 23 VAC 10-210-610 C then states:
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- Any landscaper, nurseryman, or contractor who goes beyond the sale and planting of shrubbery, sod, etc. and contracts to grade, seed and fertilize lawns or to provide periodic fertilizing or weed killing treatments is deemed to be a consumer of all tangible personal property used in performing such service and must pay the tax on such property at the time of purchase. [Emphasis added.]
Under this regulation, a business is deemed to be a contractor only with respect to the services it renders beyond the sale and installation of shrubs, trees and plants. These services include those performed by the Contractor such as the provision and installation of an irrigation system, well drilling, installing a pump station, excavation, soil compaction, removal of rock, debris hauling, site grading, and dewatering of the construction site.
The regulation states that these types of services, when rendered by landscapers, nurserymen and contractors, are not retail sales and must be treated differently from the sale and installation of plants, shrubs, and trees. Subsection C refers to "such service" to differentiate between services like those performed by the Contractor and the retail sale and planting of plants, trees and shrubs.
Public Document (P.D.) 87-130 (4/21/97) and, more recently, P.D. 04-100 (09/08/04) are on point with the facts of the Taxpayer's case. These documents explain that landscape contractors are always considered retailers with respect to the sale and installation of plants, trees and shrubs. This is true although a landscape contractor may not operate as a typical retail business and when contracts consist of real property services provided along with the sale and installation of trees, shrubs and plants. Other public documents issued by the Department have consistently reflected this policy, including P.D. 97-82 (2/19/97) and P.D. 94-222 (7/18/94). These documents support the audit findings that the provisions of Title 23 VAC 10-210-610 B and C apply to the Contractor's landscaping business and therefore, to transactions with the Taxpayer. The audit assessment is correct in this regard.
Audit Sample
The Taxpayer maintains that the inclusion of the Contractor's charge in the audit sample distorts the results of the sample. This transaction is the largest in the sample, and the Taxpayer suggests that it is not representative of its normal business activities.
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The Department will remove an item from an audit sample if it is shown that the transaction is isolated in nature and not a normal part of a taxpayer's business activity.
While the transaction in this case constitutes a large percentage of the taxable measure in the audit sample, the auditor observed transactions for similar amounts billed by other landscape contractors during the review of the Taxpayer's records. Based on these observations, the sample transaction was not isolated in nature and was part of the Taxpayer's normal business activity. The amount of the transaction is not unusual when compared to other purchases made by the Taxpayer during the course of business. There is no basis to remove the transaction from the audit sample.
Conclusion
Based on the above, the assessment is correct as issued. The outstanding balance of ***** remains due and payable and must be paid within 30 days from the date of this letter to avoid the accrual of additional interest. The Taxpayer's payment should be sent 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 public documents and regulations cited are available on-line in the Department's Tax Policy Library, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, please contact *********** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
- Sincerely,
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AR/50480S
Rulings of the Tax Commissioner