Tax Type
Retail Sales and Use Tax
Description
Contractor and a retailer of security systems
Topic
Appropriateness of Audit Methodology
Assessment
Collection of Delinquent Tax
Date Issued
08-25-2004
August 25, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax.
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** (collectively, the "Taxpayer") for the audit period March 1999 through February 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer operates as a contractor and a retailer of security systems (monitored and nonmonitored) in Virginia and in other states. In addition, the Taxpayer sells and installs circuit television and card access systems. The Taxpayer correctly collected and remitted the tax on nonmonitored systems and component parts. The Department's audit disclosed that the Taxpayer had not paid the tax on purchases used in the installation of monitored systems and component parts that become real property upon installation. Rather, the Taxpayer erroneously collected 2.5 percent sales tax from its customers on such sales. The auditor assessed the use tax on the purchases in connection with the real property contracts and gave credit in the audit for the 2.5 percent collected and remitted in error.
The Taxpayer states that it collected the tax on sales as previously instructed by the Department's auditor in 1989. Further, the Taxpayer states that it was audited again in 1996 and the Department's auditor found no errors in the methods used in applying the tax to real property installation contracts. The Taxpayer believes it should not be held liable for the tax on the contested purchases because it followed procedures and collected sales tax according to instructions by the Department's prior auditor.
DETERMINATION
Real property contracts
Generally, a person who contracts to furnish and install tangible personal property that becomes permanently affixed to realty is the taxable user or consumer of all materials and equipment used in the performance of such contracts. See Title 23 of the Virginia Administrative Code (VAC) 10-210-410.
Pursuant to a real property contract, a contractor is liable for the tax on all purchases of tangible personal property made in Virginia or shipped into Virginia, even if those materials are subsequently used or consumed outside Virginia. No tax will apply, however, to materials purchased from an out-of-state vendor who ships materials directly to the contractor at a job site outside Virginia, provided the materials are only for use outside Virginia and none of those materials subsequently enters Virginia.
Title 23 VAC 10-210-230(A) specifically addresses monitored systems and states that "charges for monitored systems constitute charges for a service which is not subject to the tax. The person selling/leasing and installing the monitored system is deemed to be the user and consumer of all personal property used in providing the service and must pay the tax on such property at the time of purchase." Section C of this same regulation further provides that "persons engaged in the sale and installation of other types of security devices ...which become permanently affixed to realty are contractors with respect to such transactions and must pay the tax on all property installed or used in the installation at the time of purchaser withdrawal from nontax paid inventory."
In this case, the Taxpayer sold and installed monitored systems and other components that became real property upon installation. The regulations are clear that the Taxpayer is the user or consumer of all materials and equipment used in real property contracts and must pay the tax on all purchases. Accordingly, the auditor correctly assessed the tax on these transactions.
Tax paid to another state
The Taxpayer charged its customers 2.5 percent tax on real property installation contracts and remitted the tax to the state in which the work was performed. The auditor gave credit in the audit for the 2.5 percent collected and remitted in error to Virginia. No credit was given for the tax remitted in error to another state. The Taxpayer indicates that it intends to send a copy of the Department's audit to the state in which the tax was remitted in error and request that they refund the tax to Virginia. The Taxpayer contends that it should not be required to pay the tax on the contested items in the event the other state does not refund the tax.
As previously mentioned, a real property contractor is liable for the tax on all purchases of tangible personal property made in Virginia or shipped into Virginia, even if those materials are subsequently used or consumed outside Virginia. No tax will apply, however, to materials purchased from an out-of-state vendor who ships materials directly to the contractor at a job site outside Virginia, provided the materials are only for use outside Virginia and none of those materials subsequently enters Virginia.
In this case, delivery of the materials and equipment occurred in Virginia prior to the Taxpayer's use in real property contracts in other states. Therefore, the Virginia sales and use tax applies to the Taxpayer's first use of the materials in Virginia when it initially received title or possession to the property in Virginia. Accordingly, the auditor correctly assessed the use tax on the contested purchases. Further, no credit for taxes paid in error to other states can be applied against the Virginia sales and use tax owed. See 23 VAC 10-210-450.
With regard to the prior audit issue, you contend that you relied on information furnished by the Department regarding the application of the retail sales and use tax to your operations. As noted in the Tax Commissioner's determination in Public Document 02-110 (7/12/02), absent specific written documentation regarding instructions provided by the Department, relief cannot be granted.
Conclusion
Based on the above, I find no basis for revising the assessment. 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 Taxpayer should remit full payment to the Department's Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23282-1880, Attn: *****.
The regulations and Public Document cited, along with other reference documents 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, please
contact ***** at *****.
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- Sincerely,
Kenneth W. Thorson-
- Tax Commissioner
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- Sincerely,
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AR/42194T
Rulings of the Tax Commissioner