Document Number
07-171
Tax Type
Consumer Use Tax
Retail Sales and Use Tax
Description
Effective immediately, the Department will change its policy regarding the application of the sales and use tax to certain persons that sell and install trees, shrubbery, plants, other nursery stock, sod, silt fence and similar items that become real property upon installation.
Topic
Clarification
New Procedure(s)
Date Issued
11-07-2007


November 7, 2007





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

Dear *****:

This will reply to your letter in which you seek correction of an assessment issued to ***** (the "Taxpayer"), for the period March 1999 through December 2004. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer is a real property contractor that specializes in excavation, trucking and hauling, sod installation, silt and orange fence installation and similar construction site services. The Taxpayer considers itself to be a real property contractor with respect to all the contract work it performs. The Department audited the Taxpayer and treated it as a retailer with respect to transactions in which it furnished and installed sod and silt fence. As a result, the Taxpayer was assessed sales tax on its retail sales of sod and silt fence.

The Taxpayer maintains that it is a using and consuming contractor in accordance with Va. Code § 58.1-610, and that it properly pays sales and use tax on purchases made for use in its contracting business. To support this position, the Taxpayer notes that it is recognized as a contractor for both federal and Virginia income tax purposes and that it is classified as a contractor for local tax purposes. Further, the Taxpayer has an office in an industrial park but does not conduct any retail activities. As such, the Taxpayer maintains that it purchases sod, silt fence and other construction materials for installation only. In addition to contesting the tax, the Taxpayer contests the fact that the Department did not allow a credit in the audit for sales tax paid on materials purchased for resale and that the tax is assessed on labor charges included in lump sum billings to customers for sod and silt fence sales and installation.

DETERMINATION


Current Policy

Title 23 of the Virginia Administrative Code (VAC) 10-210-610 sets out the application of the sales and use tax to businesses that furnish and install flowers, shrubbery, nursery stock, sod and similar items. Contractors that provide these types of items under the terms of real property contracts, or as part of real property construction projects, are deemed to be making taxable retail sales rather than providing services with respect to real estate. Title 23 VAC 10-210-610 B states:
    • When a nurseryman, florist or other person makes retail sales of shrubbery and similar items, and as a part of the transaction agrees to transplant them on the land of the purchaser for a lump sum, the tax applies to the total charge. The tax does not apply to the charge for transplanting if the charge is separately stated on the invoice. [Emphasis added.]
    • Title 23 VAC 10-210-610 C then states:
    • Any landscaper, nurseryman, or contractor who goes beyond the sale and planting of shrubbery, sod, etc. and contracts to grade, seed and fertilize lawns or to provide periodic fertilizing or weed killing treatments is deemed to be a consumer of all tangible personal property used in performing such service and must pay the tax on such property at the time of purchase. [Emphasis added.]

In applying the above regulation to contractors, the Department's established policy is that a business is deemed to be a using and consuming contractor only with respect to the services it renders beyond the sale and installation of shrubs, trees, plants and sod. These services typically include grading, seeding, mowing and fertilizing. The Taxpayer provides services, including hauling of construction debris and excavating, that are examples of the types of real property services contemplated in this regulation. Businesses that perform these types of real property services should operate as using and consuming contractors and pay the applicable sales or use tax on purchases of tangible personal property used to provide these services. However, the same businesses would charge retail sales tax on the sale and installation of sod, silt fence, trees, shrubs and nursery stock. The retail sales tax would also apply to the sale of items such as mulch, gravel and topsoil if the seller merely delivers these materials to the customer without installation or the customer picks up the materials.

This position is supported by a number of prior rulings of the Tax Commissioner that have consistently reflected this policy, including Public Documents 04-204 (11/23/04), 05-5 (2/1/05), 96-277 (10/15/96) and 96-181 (7/24/96). In each of these documents, the Department determined that the provisions of Title 23 VAC 10-210-610 apply to all contractors and that the application of this regulation is not limited to certain types of businesses or transactions.

The sale and installation of sod and silt fence is an integral and regular part of the Taxpayer's business. Notwithstanding the fact that Va. Code § 58.1-610 generally applies to contractors, the Department's longstanding policy supports the audit findings that the Department's regulation for florists, nurserymen and landscape contractors, Title 23 VAC 10-210-610, applies to the Taxpayer's business of selling and installing sod and silt fence. Accordingly, the Taxpayer was properly treated as a retailer with respect to sales and installation of sod and silt fence.

Policy Change

Effective immediately, the Department will change its policy regarding the application of the sales and use tax to certain persons that sell and install trees, shrubbery, plants, other nursery stock, sod, silt fence and similar items that become real property upon installation. Construction contractors, landscape contractors and other persons that perform real property services such as construction site preparation, excavation, erosion control, drainage and irrigation system installation, debris removal and similar services will no longer be treated as retailers with respect to the furnishing and installation of trees, shrubbery, nursery stock, plants, sod, silt fence and similar items. These businesses will be the taxable users and consumers of the trees, plant materials, sod, silt fence and similar items and must pay the applicable sales tax when purchasing these items from vendors or suppliers. If a vendor does not charge the sales tax, the business will be responsible for remitting use tax on the untaxed purchases to the Department.

This policy change is intended to relieve landscapers, real property contractors and other similar businesses that primarily engage in the provision of real property services from the sales tax collection requirements mandated by Title 23 VAC 10-210-610, in which the sale and installation of trees, shrubs, plants and sod is considered a retail sale regardless of the type of business that engages in these types of transactions. These businesses will instead operate as using and consuming contractors under the provisions of Va. Code § 58.1-610 and Title 23 VAC 10-210-410, which is consistent with the Department's treatment of other real property contractors.
    • Title 23 VAC 10-210-410 A states, in part, 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.

This same regulation further states:
    • Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor. The dealer (supplier) making the sale, distribution, or lease to or storage for such a contractor must collect the tax from him.

Landscape contractors and similar businesses that perform lawn and grounds maintenance services, such as mowing, weed eating, seeding, fertilizing, mulching, trimming, pruning, aerating and similar services, continue to be the users and consumers of any purchases made to provide these services and should pay the sales tax on purchases of tangible personal property for use in the provision of their services. If the vendor or supplier does not charge the tax, the business should remit use tax directly to the Department on these purchases.

Landscapers, real property contractors and similar businesses that sell tangible personal property without installation will be required to register and collect the retail sales tax on such sales. Thus, the sale of trees, shrubs, nursery stock, plants, mulch, gravel, topsoil, sod and silt fence without installation by the seller are retail sales and are subject to the tax. This treatment is consistent with the Department's current policy as set out in Title 23 VAC 10-210-410 B, which states that using and consuming contractors can also be engaged in making retail sales. In such cases, contractors must register and collect the Virginia sales tax on sales of tangible personal property that they do not install. For example, a landscape contractor sells and delivers a truckload of mulch to a customer. The customer will spread the mulch. This is a retail sale and the contractor is required to charge sales tax on the transaction. The delivery charge, if separately stated, is exempt from the tax.

The provisions of Title 23 VAC 10-210-610 will continue to apply to retail establishments such as florists, nurserymen, garden centers, home improvement stores, greenhouse operators and similar retail businesses that sell and install trees, shrubs, nursery stock and plants. These businesses will continue to treat the sale and installation of these types of items as retail sales transactions and collect the applicable sales tax from customers. Installation charges will continue to be exempt from sales tax when separately stated on the sales invoice.

CONCLUSION


In accordance with established policy at the time of audit, the Taxpayer was properly treated in the audit as a retailer with respect to its sale and installation of sod and silt fence. The Taxpayer should have charged and remitted sales tax to the Department on the sale of these items during the period audited. After careful consideration of the facts related to this appeal and the Department's decision to change its policy, the Department will settle the contested assessment as an offer in compromise under Va. Code § 58.1-105. The Department will address the settlement in a letter under separate cover.

The decision to settle the assessment in this manner is not an admission that the Department's prior policy was incorrect. The public documents cited and our regulation, Title 23 VAC 10-210-610, demonstrate that our policy was established and longstanding. However, the policy change is intended to address changes in the construction and building industries that now reflect an increase in the number of businesses that perform landscaping, erosion control and similar services and that operate more like real property contractors than traditional retailers. The Department plans to issue a tax bulletin to announce and provide additional information about the policy change.

As a result of this policy change, the Taxpayer's sales tax registration will be changed to a consumer use tax registration. This will enable the Taxpayer to remit use tax directly to the Department on its untaxed purchases. As a using and consuming real property contractor, the Taxpayer should notify suppliers that it is no longer eligible for the resale exemption on purchases of trees, shrubs, nursery stock, sod, silt fence and orange fence. These suppliers should begin charging Virginia sales tax on the Taxpayer's purchases.

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line 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 or the application of the policy change to your business operations, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner




AR/56838S


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46