Tax Type
Retail Sales and Use Tax
Description
Car wash system
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
06-10-2004
June 10, 2004
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. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a convenience store with full service car wash and quick lube centers. An audit for the period August 1998 through June 2001 resulted in the assessment of use tax on purchases of tangible personal property used or consumed in the Taxpayer's operations.
The Taxpayer takes exception to the tax assessed on various components that make up its car wash system and maintains that these components are permanently affixed to the realty. The Taxpayer contends that the vendor who furnished the components and arranged for their installation is liable for the tax on the cost of the components as a real property construction contractor.
The Taxpayer's car wash system is housed in a long tunnel and uses an automated conveyor system that incorporates computer monitors and control consoles, a foam sprayer, curtains, brushes, wands, chemical and water applicators, and blowers. Reclaim equipment for recycling water and other pumps and motors are housed in a chemical room. Other equipment includes neon signs to indicate the wash cycles, a photo eye device used to maintain vehicle separation, a compressor to inflate tires, a towel washer, and a vacuum system.
DETERMINATION
In determining whether an article used in connection with realty is to be considered real or personal property, the Virginia Supreme Court has ruled:
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- Three general tests are applied to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970).
Under the first test, there must be actual or constructive annexation. The method or extent of the annexation carries little weight. The second test, adaptation of the personal property to the use of the property to which it is annexed, is entitled to great weight, especially in connection with the element of intention. The intention of the party making the annexation is the paramount and controlling consideration. Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941).
Three-prong test
First test. The computer software and hardware equipment used to control the flow of vehicles through the car wash bay are not in any way attached to the realty. Motors and pumps used in the chemical room, however, are hardwired into the building's electrical system and bolted to the floor. The compressor, towel washer, and reclaim equipment are also hardwired into the building. Neon signs for the wash cycles are bolted to the building. A vacuum system located outside the building is bolted down. In addition, the metal arches used to hold curtains, pressure gun units, tire brushes, chemical applicators, wands, blowers and other devices of the car wash system are bolted to the bay floor. These methods of attachment do not constitute a permanent annexation to realty unless both the second and third tests set out in Transcontinental Gas Pipe Line are satisfied.
Second test. You maintain that "[a]II of the items in question are essential to the purpose for which the building is used ...[and] cannot be altered without incurring significant cost or expenditure." I understand, however, that the contested devices can be easily removed without any damage to the building. Accordingly, these devices could be readily relocated to a similar facility if necessary.
Moreover, the car wash bay is part of one structure that also contains a lube and oil center and convenience store. Thus, this structure serves more than one purpose and could be internally adapted to other commercial purposes. Accordingly, I cannot conclude that the car wash bay is essential and integral to the existence and long-term use of the building for commercial purposes. Rather, the car wash bay of the structure could ultimately serve other business purposes when the real property is resold and thus be used for purposes not requiring car wash equipment and devices. Accordingly, the contested devices of the car wash system are not permanently adapted to the structure and do not satisfy the second test.
Third test. Pursuant to Mullins v. Sturgill, 192 Va. 653 (1951), intent "is to be generally found from the facts existing at the time the machinery is installed in the building, its manner of installation, its purpose, and the intention of the annexor ...." You indicate that the Taxpayer "has subsequently purchased the property from the landlord and has no intentions of altering the machinery and equipment in place." This statement suggests that the Taxpayer had leased or rented the real property when the contested items were purchased and installed. No sales agreement between the Taxpayer and former owner has been provided to demonstrate that the contested devices were treated as part of the former owner's realty.
The Taxpayer has not shown that the car wash system enhances the market value of the Taxpayer's real property. Furthermore, I understand that the locality in which the car wash is located taxes the car wash equipment and machinery as business personal property and not as improvements to real property. Further, the Taxpayer has not shown that the car wash system is included in a mortgage on the real property.
I am also concerned that no documents have been submitted indicating how the Taxpayer classified the car wash system for federal tax depreciation purposes. This information would help give a more complete picture of the Taxpayer's intent with respect to the contested property.
In addition, the Taxpayer's car wash system is not analogous to the fuel delivery system addressed in Public Document (P.D.) 00-65 (4/26/00). In P.D. 00-65, the fuel delivery system is absolutely essential for using the underground gas tanks (i.e., real property fixtures). Removal of those gas tanks would also substantially damage the realty above it. In the Taxpayer's case, the car wash system is removable without significant damage to the realty and is not absolutely needed for the long-term commercial use of the building. Moreover, the intent of the parties to annex the property to realty in P.D. 00-65 was much clearer than in this case.
For all of the above reasons, the third test is not satisfied.
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.
The Code of Virginia sections, regulations and public documents 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/40576R
COMMONWEALTH of VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN:
Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate
to Janie E. Bowen, Executive Tax Commissioner, the authority to sign for me any and
all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers
in compromise and sales tax revocations in my absence and in the absence of the
Deputy Tax Commissioner.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective June 2, 2004, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 2nd day of June 2004.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Janie E. Bowen Date: June 2, 2004
Done this 2nd day of June in the City of Richmond, State of Virginia.
My Commission expires 9-30-07.
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner