Document Number
06-50
Tax Type
Retail Sales and Use Tax
Description
Purchase of store fixtures from an out-of-state contractor for installation in VA
Topic
Credits
Property Subject to Tax
Date Issued
04-18-2006



April 18, 2006




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

Dear *********:

Your letter seeks correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the audit period September 2000 through July 2003. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer is a retailer of athletic products with retail locations throughout the United States, including Virginia. The Department's auditor assessed tax on untaxed fixed assets and expense purchases for use in the Taxpayer's Virginia store locations. At issue is the Taxpayer's purchase of store fixtures from an out-of-state contractor for installation in the Taxpayer's new and remodeled stores in Virginia. The Taxpayer claims that the contested store fixtures became realty upon installation, and the contractor correctly paid tax to another state (Pennsylvania) on such items. Because the tax was paid to another state, the Taxpayer claims the Department should allow a credit in the audit for the tax paid by the contractor on the contested store fixtures.

DETERMINATION


Retail Store Fixtures

The Taxpayer contracts with a contractor to build-out both new and remodeled store locations. The build-out includes, but is not limited to, demolition, electrical work, plumbing, drywall, carpeting, concrete, and lighting. The Taxpayer also purchases store fixtures from the same contractor in separate sales transactions that include installation. The Taxpayer maintains that the store fixtures become realty upon installation and, therefore, the contractor is liable for the tax.

In determining whether an article used in connection with realty is to be considered real or personal property, the Virginia Supreme Court has ruled that three tests are applied. 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, 172 S.E. 2d 757 (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. Based on a review of the purchase invoices, the contested store fixtures consist of cashwraps, nesting tables, shelf brackets, benches, coat hooks, rolling ladders, tables, accessory panels, and other similar fixtures. The cashwraps and nesting tables are free standing units used to display apparel and accessories. The benches, coat hooks, and shelves are items that may be screwed in the wall or floor in a manner as to be removed without damage to the realty. 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. Based on the type of installation, the contested items can be easily removed without any damage to the building. Accordingly, the contested store fixtures are not permanently adapted to the structure and do not satisfy the second test. This determination is consistent with the Public Document (P.D.) 97-28 (1/30/97).

Third test. Generally, a lease agreement between the landlord and retailer provides the intent of the parties on whether property will become a permanent fixture or remain tangible personal property. In this case, it appears that the Taxpayer leases Virginia store locations within area malls. The Taxpayer has provided no lease agreement or other document indicating that the contested store fixtures are intended to be permanent. This being the case, I find that the store fixtures in question do not satisfy the third test.

Based on the foregoing, the contested store fixtures did not become real property upon installation. Rather, they remained tangible personal property. As the purchaser of tangible personal property, the Taxpayer is liable for the tax on untaxed items used in Virginia. See Va. Code § 58.1-604.

Pennsylvania Law Regarding Contractors

The Taxpayer claims that, under Pennsylvania law, its supplier of store fixtures is considered to be a construction contractor and required to pay the tax on purchases of tangible personal property used in its construction activities. Because Pennsylvania does not have a temporary storage exemption, the Taxpayer maintains that the contractor properly paid the tax to Pennsylvania on the contested store fixtures.

Under Pennsylvania regulations, specifically 61 Pa. Code § 31.12, construction contractors are required to pay tax on all purchases of tangible personal property that is to become a permanent part of real estate, in the fulfillment of a construction contract. A construction contract is defined under 61 Pa. Code § 31.11 as "a contract, whether lump sum, cost plus, unit price or time and materials under which a person agrees to perform construction activities." The term "construction activities" is defined as "an activity resulting from an agreement or contract under which a contractor attaches or affixes tangible personal property to real estate so as to become a permanent part thereof." [Emphasis added.]

This same code section defines "sales activities" as "an activity resulting from an agreement or contract under which a contractor transfers tangible personal property or performs services upon tangible personal property belonging to another person and installs the property so as not to become a permanent part of the real estate." Store fixtures, shelving, and islands are specifically listed in this section as items that remain tangible personal property upon installation.

Subsection 4 of 61 Pa. Code § 31.12 states that "a contractor who performs both construction activities and sales activities shall be required to be licensed with the Department for the collection and remission of sales tax . . . ." The contractor may use a resale exemption certificate to purchase property that the contractor knows he will resell.

In this case, the contractor performed both construction activities (demolition, electrical, plumbing, drywall, etc.) and sales activities (sale and installation of store fixtures) in connection with the build-out of the Taxpayer's Virginia store locations. The store fixtures at issue did not lose their identity as tangible personal property upon installation and are subject to the Virginia sales and use tax when sold by the contractor to the Taxpayer. Accordingly, the auditor properly assessed the Taxpayer's purchase of the store fixtures.

Credit for Taxes Paid to Another State
    • Title 23 Virginia Administrative Code 10-210-450 A provides that
    • 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.

Based on Pennsylvania law, the contractor is clearly making retail sales of tangible personal property, and, therefore, the sale of the store fixtures to the Taxpayer was subject to the Virginia sales and use tax. Further, the contractor, not the Taxpayer, incorrectly paid Pennsylvania tax on the store fixtures. Therefore, in accordance with the regulation, the Taxpayer is not entitled to a credit in its audit for tax erroneously paid to another state by the contractor.

CONCLUSION


Based on the foregoing, the assessment is correct. The Taxpayer will receive an updated bill including accrued interest charges. This bill should be paid within 30 days from the date of the bill to avoid the accrual of additional interest charges. Please return your payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attn: *****.

The Code of Virginia section, regulation and public document cited are available on­line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** at *****.
                • Sincerely,


                • Kenneth W. Thorson
                    • Tax Commissioner




AR/53560T


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46