06-92 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax on purchases of tangible personal property used in construction projects

Topic

Collection of Tax

Records/Returns/Payments

Tangible Personal Property

Date Issued

09-19-2006

September 19, 2006

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 Department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period June 2001 through May 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a real property contractor. During the audit period, the Taxpayer's customer issued purchase orders to the Taxpayer to perform various construction projects at the customer's production plant. The customer holds a direct payment permit. On the face of the purchase orders, the customer indicated that it was the responsible party for accruing and remitting the sales tax on its purchases. Based on the statement printed on the purchase orders, the Taxpayer did not pay sales tax or accrue use tax on its purchases of tangible personal property used in the construction projects. The Taxpayer states that its customer is currently under audit by the Department and that the invoices in question would be included in that audit. Accordingly, the Taxpayer seeks to have the tax on the invoices at issue removed from its audit.

DETERMINATION

Application of Tax to a Contractor

Virginia Code § 58.1-610 A provides that a person who contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon and who furnishes tangible personal property is deemed to have purchased the tangible personal property for use or consumption. Title 23 of The Virginia Administrative Code (VAC) 10-210-410 further provides that "the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts."

A contractor who enters into a real estate construction contract to furnish and install construction materials does not resell the construction materials. Rather, the contractor is deemed the final user or consumer of the materials purchased under its own credit for installation. In this case, the Taxpayer furnished and installed materials, which upon installation became a part of the realty. Based on Title 23 VAC 10-210-410, the auditor properly treated the Taxpayer as a contractor with respect to real estate and the incidence of the tax is upon the Taxpayer in this instance. Accordingly, the Taxpayer is liable for the use tax on its purchases of construction materials.

Direct Payment Permit

Virginia Code § 58.1-624 sets out the provisions for a direct payment permit. Subsection D provides that upon receipt of a direct pay permit number, a dealer is absolved from all duties and liabilities for collection and remittance of the tax with respect to sales, distributions, leases, or storage of tangible personal property to the permit holder. In this case, the Taxpayer is not a dealer and it is not making retail sales of tangible personal property, but rather is the user and consumer of the tangible personal property at issue. The direct payment permit number provided by the customer does not relieve the Taxpayer from its responsibility to remit the use tax on its purchases of materials used in connection with its real property contracts.

Customer Audit

The secrecy of information provisions in Va. Code § 58.1-3 prevent me from commenting directly on the audit proceedings of the Taxpayer's customer. As a general observation, when a real property contractor performs real property construction and the legal incidence of the tax is on the contractor, an auditor will not assess the tax to the contractor's customer. This approach is mandated by Va. Code § 58.1-610 and Title 23 VAC 10-210-410.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning the payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact ***** of the Department's Office of Policy and Administration, Appeals and Rulings, at ***** or at *****@tax.virginia.gov.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/56086Q

Rulings of the Tax Commissioner