Tax Type
Retail Sales and Use Tax
Description
Application of the tax to fabricators, subcontractors
Topic
Basis of Tax
Exemptions
Date Issued
08-25-2004
August 25, 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 assessment issued to ***** (the "Taxpayer") for the period September 1998 through August 2001. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an out-of-state contractor that fabricates, erects and installs precast and hollow core panels with respect to real property construction. The Taxpayer purchases the raw materials for its fabrication work exempt of the tax. For each job, the Taxpayer computes the tax on the cost of the materials withdrawn from its tax-exempt inventory. The Taxpayer then remits the tax to the appropriate taxing jurisdiction.
The Taxpayer entered into a subcontract with a general contractor to fabricate, erect and install precast panels as part of the construction of a building in Virginia. The owner of the building is a federal credit union that is exempt from federal and state taxation. The owner contractually designated the general contractor as its purchasing agent regarding the purchase of building materials and supplies necessary for construction of the building.
Upon audit, the Taxpayer was assessed use tax on the cost of the materials used to fabricate the panels provided in the performance of the construction contract. The Taxpayer disputes the tax and believes that it was entitled to make exempt purchases based on the tax-exempt status of the owner and the designation of the general contractor as the purchasing agent for the owner.
DETERMINATION
Contractors - Generally
Virginia Code § 58.1-609.1(4) provides an exemption from the sales and use tax for "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States." However, Va. Code
§ 58.1-610(A) deems real estate contractors to be the taxable users of all tangible personal property purchased in connection with the construction, reconstruction, installation, repair or other services with respect to real estate.
Title 23 of the Virginia Administrative Code (VAC) 10-210-410 interprets the statute affecting contractors and provides in subsection (J) regarding government contracts that the tax applies to purchases of tangible personal property for use and consumption by contractors in connection with such transactions. It provides further that "[o]nly in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax." [Emphasis added.]
Additionally, in determining the application of the tax to purchases by contractors, the Department is bound by the federal court's decision in United States v. Forst, 442 F. Supp. 920 (W.D Va. 1977) aff’d, 569 F. 2nd 881 (4th Cir. 1978). In that case, the federal courts found a federal contractor to be the taxable user and consumer of tangible personal property purchased for use in carrying out its contractual obligations. A key element in that case was the resolution of the question of whose credit was bound in purchasing tangible personal property for use by a person pursuant to a government contract. The courts found that the credit of the United States was not bound by the contractor's purchasing agreements with various vendors so as to render the transactions sales to the government. Furthermore, even though title to the purchased items passed to the government, the courts rejected the contractor's argument that the transactions were exempt sales for resale.
In this instance, the general contractor is contractually authorized to bind the credit of the owner, and therefore may make exempt purchases on behalf of the owner for use in the building construction. The Taxpayer, however, enjoys no such designation. The Taxpayer is a using and consuming contractor because it provides the panels as part of its contract to provide fabrication, erection and installation services with respect to real property. Therefore, the Taxpayer is subject to the tax on the cost of the raw materials used in connection with the construction. The regulation in Title 23 VAC 10-210-410 clearly states in section A that no sale to a contractor is exempt on the grounds that the other party to the contract is a governmental agency. The regulation goes on to say that a contractor does not pass the sales or use tax on to anyone else as a tax. The contractor takes the amount of the tax into consideration in submitting its bids.
If the Taxpayer had sold the panels without the erection and installation services, the transaction would qualify as a retail sale of tangible personal property. Then, the Taxpayer would have been able to purchase the raw materials exempt of the tax under the resale exemption and no tax would have been due on the sale to the general contractor as the purchasing agent for the exempt owner.
Based on the cited authorities, the auditor properly applied the tax and there is no basis for correction.
Fabricating Contractors
The Taxpayer fabricates panels primarily for its own use in the performance of real property contracts. The regulation in Title 23 VAC 10-210-410 provides in section (D) that fabricators of this nature must pay the tax on the cost price of the raw materials that make up the fabricated property. The tax must be paid at the time of purchase to all suppliers who are authorized to collect the Virginia tax. In instances where the supplier is not authorized to collect the tax or fails to collect the tax, the tax must be remitted directly to the Department on the Consumer's Use Tax Return, Form ST-7. In accordance with the regulation, the Taxpayer is not authorized to make exempt purchases in Virginia of raw materials used in fabricating panels it erects and installs in real property construction in Virginia.
To further illustrate the application of the tax to fabricators, I am enclosing Public Document 96-274 (10/9/96). The ruling addresses the application of the tax to a steel fabricator's contract with an exempt government authority regarding the fabrication, delivery and installation of steel beams in real property construction.
Conclusion
The assessment is correct as issued. Accordingly, there is no basis to refund any of the tax paid.
The Code of Virginia sections, regulation and public document cited are available in the Tax Policy Library section of the Department website at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/39758J
Rulings of the Tax Commissioner