Document Number
05-131
Tax Type
Retail Sales and Use Tax
Description
Assessment of use tax on job materials used in out-of-state jobs is erroneous.
Topic
Credits
Exemptions
Date Issued
08-03-2005


August 3, 2005



Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letters in which you seek the correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer") for the period July 1999 through June 2002. I apologize for the delay in the Department's response.

FACTS

The Taxpayer sells and installs flooring and floor coverings to Virginia and out-of-state customers. The Taxpayer is treated as a contractor for Virginia sales and use tax purposes based on the provisions of Title 23 of the Virginia Administrative Code (VAC) 10-210-410 G. The Taxpayer is not a retailer as the term is defined in this regulation because it does not maintain a retail or wholesale place of business or an inventory of floor covering products. The Taxpayer was audited and, consistent with its treatment as a using and consuming contractor, assessed use tax on flooring and floor covering materials delivered to its Virginia warehouse and then used on out-of-state jobs. The Department assessed the tax based on the Taxpayer's "first use" of the job materials in Virginia.

The Taxpayer maintains that the Department's assessment of use tax on job materials used in out-of-state jobs is erroneous. The Taxpayer paid use tax to the states where the flooring materials were installed and suggests that it is entitled to credits against the Virginia use tax assessed for the use taxes paid to the other tax jurisdictions. The Taxpayer contends that a temporary storage exemption applies to job materials purchased and delivered to it in Virginia for use on out-of-state jobs. In addition, the Taxpayer states that it has paid sales and use taxes to Virginia based on instructions received during previous audits conducted by the Department.

DETERMINATION

Credit for Taxes Paid to Other States

Virginia Code § 58.1-611 states the following:
    • A credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state. The amount of the credit shall be equal to the tax paid by him to another state or political subdivision thereof by reason of the imposition of a similar tax on his purchase or use of the property. The amount of the credit shall not exceed the tax imposed by this chapter.

Title 23 VAC 10-210-450 interprets this statute. Paragraph A of this regulation states, in part:
    • Any person who purchases tangible personal property in another state and who has paid a sales or use tax to such state or its political subdivision or both on the property, is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase . . . This credit does not apply to tax erroneously charged or incorrectly paid to another state.

A reading of the statute and the regulation indicates that the credit for taxes paid to other states or taxing jurisdictions applies in situations where the tax is paid to the state or jurisdiction where the purchase is made and the property is used in Virginia subsequent to the initial purchase transaction. The credit is intended to prevent the double taxation of property brought into Virginia after it is purchased and taxed in another state or jurisdiction.

In this case, I cannot agree that use tax was correctly paid to the other states or tax jurisdictions. As a contractor, the Taxpayer is required to pay sales and use tax on the purchase and use of tangible personal property in Virginia. "Use" is defined in Va. Code § 58.1-602 as "the exercise of any right or power over tangible personal property incident to the ownership thereof . . . ." The Taxpayer purchases, takes delivery of and stores floor coverings and flooring materials at a Virginia warehouse. The Taxpayer's possession and storage of these items in Virginia prior to their transport out-of-state constitutes "use" as the term is defined for sales and use tax purposes. For this reason, the floor coverings and flooring materials are subject to Virginia sales and use tax prior to their use by the Taxpayer in other states or tax jurisdictions. The Taxpayer did not pay sales tax to Virginia or another taxing jurisdiction on the purchase of the job materials for use in other states. Therefore, Virginia use tax was due on the job materials when the Taxpayer took possession of the items at the Virginia warehouse.

Temporary Storage Exemption
    • Virginia Code § 58.1-609.3(1) provides an exemption from sales and use tax for:
    • Personal property purchased by a contractor which is used solely in another state or in a foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or foreign country, and which is stored temporarily in Virginia pending shipment to such state or country.

The Department's regulation, Title 23 VAC 10-210-410 I interprets this exemption and states, in part, the following:
    • Construction contractors may purchase exempt from tax construction materials for temporary storage in Virginia to be used in exempt construction projects in other states or foreign countries.

The second paragraph of this regulation continues as follows:
    • This exemption is restricted to construction materials incorporated into exempt real property construction. The tax applies to equipment, tools, supplies, etc., used in performance of the construction contract. The tax applies to all other construction materials, temporarily stored in Virginia, that will be incorporated into real estate construction projects outside Virginia.

The regulation indicates that the temporary storage exemption applies to construction contractors that purchase and take delivery of construction materials in Virginia and subsequently transport the materials out of Virginia for use on construction projects in state or local jurisdictions that exempt the specific construction project. Typically these exempt construction jobs are performed for nonprofit or governmental entities that meet specific criteria mandated by the exemption statute that is in effect for the taxing jurisdiction where the project is performed. The Taxpayer should note that construction contractors entitled to this exemption must obtain certificates of exemption from the Department by written request. The contractor's request must include information showing that construction materials could be purchased free from sales and use tax in the state or foreign country where the exempt job is to be performed.

The Taxpayer has interpreted this exemption to apply to its operations in a much broader sense than the regulation indicates. The regulation clearly limits the exemption to real property construction work and shows that the temporary storage exemption has no application to other sales and use tax exemptions, i.e., the resale exemption. I understand that the audit has been adjusted to remove job materials used by the Taxpayer in exempt construction projects in other states based on documentation provided by the Taxpayer.

Prior Audit

The Taxpayer indicates in its appeal letter that sales and use tax was applied to purchases of materials for out-of-state jobs based on instructions provided by the Department during the Taxpayer's last audit. The Taxpayer states that the Department agreed in that audit to allow credits for use taxes paid to other states against the Taxpayer's Virginia use tax liability for job materials purchased in Virginia and subsequently used in other states. The Taxpayer has provided copies of information given to it during the last audit to support its claim.

Based on a review of the last audit report and the documentation provided by the Taxpayer, I agree that the Taxpayer was following the Department's instructions to take credits against Virginia use tax due for use taxes paid to other states on job materials purchased and received in Virginia and then used on out-of-state construction jobs. Pursuant to Va. Code § 58.1-1835, I find that the Taxpayer reasonably relied on the erroneous written and verbal advice provided during the prior audit. Accordingly, the audit will be revised to remove job materials used on out-of-state construction jobs and the assessment will be recalculated.

On a prospective basis, the Taxpayer should begin paying Virginia sales or use taxes on all purchases of flooring and floor covering materials purchased and stored in Virginia and then used on out-of-state jobs. The states in which the job materials are used should grant a credit for Virginia tax paid on these materials against any potential sales and use tax liability. The Taxpayer should also contact the Department in writing to obtain exemption certificates for exempt construction work performed in other states in accordance with the regulation previously cited.

CONCLUSION

Based on the determination above, the Taxpayer's audit will be revised and a revised bill will be issued that reflects the new balance due. The balance due should be paid within 30 days of the date of the revised bill to avoid the accrual of additional interest

The Code of Virginia sections and regulations cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions concerning this determination, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,


                    • Kenneth W. Thorson
                      Tax Commissioner



AR/51808S


COMMONWEALTH of VIRGINIA
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 Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.

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 January 10, 2003, and shall remain in effect until revoked.

Done at Richmond, Virginia, this 13th day of January 2003.


Kenneth W. Thorson
Tax Commissioner

Acknowledgement: Gerald H. Gwaltney Date:

Done this 13th day of January 2003 in the City of Richmond, State of Virginia. My
Commission expires 9-30-2003.



Sylvia J. Wesson
Notary Public Notary Seal


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46