07-81 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax of warehouse racking and equipment sold/installed by the Taxpayer

Topic

Exemptions

Tangible Personal Property

Date Issued

05-18-2007

May 18, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in response to your letter in which you request a ruling on behalf of ***** (the "Taxpayer") on the application of the retail sales and use tax to warehouse racking and equipment ("racking system") sold and installed by the Taxpayer.

FACTS

The Taxpayer asks whether its racking systems become a permanent part of the realty when installed or remain tangible personal property upon installation. The racks are capable of supporting heavy amounts of inventory. The racks are about 42 inches deep and built in rows using two upright beams spaced about every eight feet and stabilized with base plates that are anchored to the floor with concrete and epoxy anchors inserted into a predrilled hole in the floor and secured. Typically, no welding or cutting is required. The anchors have expandable collars that, when secured, the anchors must be cut in order to remove the racks. When the anchors are severed, the holes in the concrete flooring are generally re-filled with concrete.

RULING

Real Property vs. Tangible Personal Property

In determining whether an article used in connection with realty is to be considered real or personal property, the Virginia Supreme Court has ruled:

- Three general tests are applied to determine whether an item of personal property placed upon realty becomes itself realty. 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).

Based on the Taxpayer's anchoring method, it is clear that such method satisfies the first test of the three-prong test set out in Transcontinental Gas Pipe Line. However, I find that the Taxpayer's racking system does not satisfy the second and third tests. Warehouses are general-purpose buildings that can function regardless of the configuration of the storage areas. Although anchored to the realty, racks are trade fixtures that come and go as the building's use changes and as ownership changes. For these reasons, I find that the Taxpayer's racking systems are not permanent improvements to the realty and would, therefore, generally constitute sales of tangible personal property. This finding is consistent with Public Document (P.D.) 02-162 (12/18/02), in which the Department held that a conveyor system installed in a similar manner remains tangible personal property upon installation.

Pursuant to Va. Code § 58.1-603, the sales tax is imposed on the gross sale price of tangible personal property when sold at retail or distributed in Virginia. The term 'sales price' is defined by Va. Code § 58.1-602 to mean:

- The total amount for which tangible personal property or services are sold, including services that are part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

As such, the retail sales and use tax applies to the sale price of the racking system, including any separately stated engineering charges, permit fees, or other costs of the sale. However, separately stated charges for installation labor and transportation are exempt pursuant to Va. Code §§ 58.1- 609.5 2 and 58.1-609.5 3. For further clarification on transportation and delivery charges, see Title 23 of the Virginia Administrative Code ("VAC") 10-210-6000. The Taxpayer must be registered with the Department to collect the sales tax on all taxable sales. For further registration information, see Title 23 VAC 10-210-460.

Exemptions From Tax

There is no general or specific exemption for warehouse equipment or racking systems. Rather, the tax is generally collectible on such sales, but there may be some instances in which an exemption would apply to racking systems, such as when the U.S. government, the Commonwealth of Virginia, or any political subdivision of this Commonwealth makes the purchase. See Va. Code § 58.1-609.1(4) and Title 23 VAC 10-210-690. Also, the industrial manufacturing exemption may be applicable if the manufacturer uses the racking systems preponderantly for storage of raw materials at the plant site for incorporation into finished products. As with any exemption from the tax, a dealer must obtain a completed and valid exemption certificate from the purchaser. For regulations on exemption certificates, see Title 23 VAC 10-210-280. For regulations on furniture and storage warehousemen, see Title 23 VAC 10-210-650.

The Code of Virginia sections, the regulations, and the public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. The Taxpayer may also register on-line at the same web site address by clicking on Businesses on the home page and then clicking on Register a New Business Online. If you have any questions about this ruling, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-940276563R

Rulings of the Tax Commissioner