Tax Type
Retail Sales and Use Tax
Description
Contested equipment used directly in rendition of a public service
Topic
Exemptions
Property Subject to Tax
Date Issued
12-08-2005
December 8, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter and phone conversation with a member of the Appeals and Rulings staff in which you seek correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer"), for the period February 1996 through February 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a ***** electrical contractor. As a result of the Department's audit, an assessment was issued for untaxed purchases of materials for use and consumption in real property contracts in Virginia. The Taxpayer disagreed with the assessment and filed an administrative appeal pursuant to Va. Code § 58.1-1821. The Department issued a determination on August 24, 2004.
The Taxpayer agrees with the Department's determination, with the exception of the tax assessed on power generating equipment. The Taxpayer states that the prior determination contained incorrect assumptions that the contested equipment became real property upon installation. The Taxpayer claims that it acted as a retailer in this instance and the purchase of the generating equipment for resale is exempt from Virginia sales tax. In addition, the Taxpayer claims the generating equipment was sold to a public service corporation for use directly in the rendition of its public service and qualifies for exemption under Title 23 of the Virginia Administration Code 10-210-3020 D.
DETERMINATION
In the Department's August 24, 2004 determination, the Taxpayer was deemed a real property contractor and the taxable user and consumer of all tangible personal property in connection with the purchase and installation of the generating equipment. The Taxpayer had incorrectly used its customer's (a public service corporation) direct payment permit to purchase the materials in question exempt of the tax. Based on the facts presented, the tax assessed on the generating equipment was upheld.
You continue to maintain that the contested equipment remains tangible personal property upon installation. In addition, you now claim that the contested equipment is being used by a public service corporation directly in the rendition of its public service and should be exempt from the tax.
Real versus Tangible Personal Property
You contend that an on-site inspection of the customer's facility confirms that the power generating equipment remains tangible personal property upon installation. Therefore, the Taxpayer's purchase of contested equipment for resale to its customer is exempt from the tax. Your position appears to be based upon the fact that while the generating equipment may be integrated with other equipment and is physically secured to the property, the equipment clearly does not lose its identity within the real property structure. The Virginia Supreme Court's opinion in Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941), however, does not support your assumption that the generating equipment is tangible personal property if it is identifiable within the real property structure.
In Danville Holding, the Court identified three factors in determining whether an item used in connection with realty is to be considered real or personal property. The Court noted that, while under the first test there must be actual or constructive annexation, the method or the extent of the annexation carries little weight except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation. The Court went on to conclude that the intention of the party making the annexation is the paramount and controlling consideration.
Based on the information provided to date, I continue to find no basis for classifying the Taxpayer as a retailer regarding the sale and installation of the generating equipment.
Certificate of Exemption, Form ST-11A
In your appeal for reconsideration, you state that the certificate of exemption, Form ST-11A, is used only to notify the supplier that the Taxpayer is responsible for the collection of any Virginia sales tax on the purchased equipment and has no bearing on the ultimate taxability of the property. Nevertheless, you indicate that the Taxpayer will provide the supplier with a certificate of exemption, Form ST-11A, for the equipment purchased.
The ST-11A specifically states on its face that a contractor certifies that all tangible personal property purchased is exempt from sales and use tax for the exempt purpose indicated on the form. This contradicts your statement that the ST-11A has no bearing on the ultimate taxation of the equipment.
As I previously indicated, a real property contractor is deemed the final user or consumer of all tangible personal property purchased in connection with a real property construction contract. Virginia Code § 58.1-610 E allows an exception in cases where the contractor is installing equipment that would qualify for exemption pursuant to the commercial and industrial exemptions set out in Va. Code § 58.1-609.3. During the audit period at issue, the exception in the statute included exempt equipment for use by a public utility directly in the rendition of its public service. Contractors entitled to benefit from the exception in Va. Code § 58.1-610 E must obtain certificates of exemption, Form ST-11A, by submitting a written request to the Department on a job-by-job basis.
The Taxpayer has provided no evidence to date that the contested equipment is used directly in the rendition of a public service and qualified for exemption at the time of purchase. It is my understanding that the Taxpayer was given the opportunity to obtain a Form ST-11A for the purchases in question. The Taxpayer, however, never provided this information to the Department.
CONCLUSION
The courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden is on the taxpayer to prove otherwise. The Taxpayer has not met the burden of proving that the contested purchases are not taxable. Based on the lack of adequate documentation to show that the contested equipment is used by a public service corporation directly in the rendition of its public service, I find no basis to adjust the audit at this time.
Notwithstanding the above, it is my understanding that the Taxpayer is in the process of gathering information to present to the Department to substantiate its claim that the contested equipment qualified for exemption from the tax at the time of its purchase. I will, therefore, allow the Taxpayer one last opportunity to provide the Department with additional information regarding this matter. This information should be mailed to the Department's Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attn: *****. Upon receipt, the documentation will be reviewed to determine if a revision to the assessment is appropriate. If the documentation is not provided within 60 days from the date of this letter, the assessment will be considered correct as issued and collection action will resume.
The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have any questions concerning this determination, please contact ***** at *****.
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- Sincerely,
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Kenneth W. Thorson-
- Tax Commissioner
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AR/52855T
Rulings of the Tax Commissioner