08-106 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Modular home transactions

Topic

Manufacturing

Taxability of Persons and Transactions

Date Issued

06-20-2008

June 20, 2008

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 ***** (the "Association").

FACTS

You present a number of questions relating to the application of the retail sales and use tax to modular home transactions. Your focus is on three main issues: registration, responsibility for payment of the tax, and computation of the tax.

In your ruling request, certain words have special meanings. Although the word 'dealer' is not used, you identify the parties as 'Virginia manufacturer' or 'Virginia retailer' with a modular home business located in Virginia. Your references to 'registered' mean registration with the Virginia Department of Taxation. Your reference to 'Tax Department' means the Virginia Department of Taxation.

RULING

The application of the retail sales and use tax to modular buildings is long-standing as demonstrated by the regulation on prefabricated house sections (Title 23 of the Virginia Administrative Code (VAC) 10-210-2080) and various public documents issued over the years. Effective on and after July 1, 2000, the taxable base upon which to apply the retail sales tax on a sale of modular buildings was reduced from 100% of the sales price to 60% of the sales price. This law change and its impact on the modular building industry are set out in Public Document (P.D.) 00-109 [Virginia Tax Bulletin (VTB) 00-3] (6/20/00).

Registration

1. Are all Virginia retailers and all Virginia manufacturers required to register with the Tax Department?

Response:

Pursuant to Va. Code § 58.1-612 B, any in-state dealer that sells tangible personal property at retail in Virginia is required to register with the Virginia Department of Taxation for the collection and remittance of the Virginia retail sales and use tax.

Any person who is a contractor with respect to real estate as described in Va. Code § 58.1-610 A is required to register with the Virginia Department of Taxation to report and remit the consumer use tax when it buys tangible personal property for which no sales tax has been collected and permanently affixes such property to realty in Virginia.

2. If not, under what circumstances is registration not required of Virginia retailers and Virginia manufacturers?

Response:

A person who does not satisfy the definitions of "dealer" in Va. Code § 58.1-612 B is not required to register to collect the retail sales and use tax. An out-of-state dealer who can be defined as a dealer pursuant to Va. Code § 58.1-612 B but does not have sufficient activity in Virginia as to require registration pursuant to Va. Code § 58.1-612 C, may voluntarily register for the collection of the sales tax as a service to its Virginia customers. See Title 23 VAC 10-210-1090. Voluntary registrations are treated like any mandatory registration, i.e., the laws and regulations have equal force and effect.

3. If required to register but not registered, what is the penalty or sanction that can be imposed on a Virginia retailer or Virginia manufacturer for failing to do so and who imposes it?

Response:

The main statutory provisions for retail sales and use tax purposes are set out in Chapter 6 of Title 58.1, Va. Code §§ 58.1-600 et seq. Other important statutes of general application are set in Chapters 1, 2 and 18 of Title 58.1, i.e., Va. Code §§ 58.1-1 et seq., 58.1-100 et seq., and 58.1-1800 et seq. In addition to the statutes cited below, the Department has issued sales and use tax regulations to interpret the statutory provisions. Penalties and sanctions applicable to sales or use tax dealers subject to the jurisdiction of this Commonwealth are set out below. The Department generally imposes and enforces these penalties and sanctions.

- Virginia Code § 58.1-625 provides, in part, the following:

- Any dealer who neglects, fails, or refuses to collect such tax upon every taxable sale, distribution, lease, or storage of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself, and such dealer shall not thereafter be entitled to sue for or recover in this Commonwealth any part of the purchase price or rental from the purchaser until such tax is paid. Moreover, any dealer who neglects, fails, or refuses to pay or collect the tax herein provided, either by himself or through his agents or employees, shall be guilty of a Class 1 misdemeanor.

With respect to overcollection of tax, Va. Code § 58.1-16 is a statute of general application and provides that, "[a]ny person responsible for collecting any tax administered by the Department [of Taxation] . . . who overcollects such tax and fails to account for and pay such overcollection to the appropriate state agency [e.g., the Department of Taxation] by the time his regular monthly or quarterly return is due shall be liable for the amount of such overcollection, and in addition a penalty of twenty-five percent of such overcollection. The Commissioner administering such tax may waive such penalty for good cause." [Inserts added.] This general overcollection provision should be read in conjunction with Va. Code § 58.1-625, which provides that "[a]ny dealer collecting the sales or use tax on 'transactions exempt or not taxable under this chapter [i.e., the Virginia Retail Sales and Use Tax Act] shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account."
This 25% overcollection penalty is superseded by Va. Code § 58.1-635, which imposes up to a 30% penalty for a failure to account for overcollected sales tax or any other sales tax, as well as, imposes a fraud penalty of 50%. Virginia Code § 58.1-635 requires the application and accrual of interest on the tax at the rate prescribed in Va. Code § 58.1-15.

Pursuant to Va. Code § 58.1-636, any dealer who fails or refuses to file a sales or use tax return, who fails or refuse:, to file a supplemental return or other data required by the Tax Commissioner, who makes a false return, who makes a false claim for refund, or who gives or knowingly receives a false exemption certificate, shall be guilty of a Class 1 misdemeanor. Other penalty provisions are set out in Va. Code § 58.1-615 B 2.

Penalties and sanctions for misusing an exemption certificate are set forth in Va. Code § 58.1-623.1. The Tax Commissioner has the authority to suspend the use of an exemption certificate by any person misusing it. Criminal penalties may also apply for using a suspended exemption certificate. In lieu of suspension, the Tax Commissioner may assess a penalty up to $1,000 for the misuse of an exemption certificate. When a person's use of an exemption certificate has been suspended, the person is required to pay the full amount of tax at the time of purchase and may not receive a refund of such tax until the person's certificate is reinstated. The suspension period is one year minimum. No interest is paid on such tax refunds.

Pursuant to Va. Code § 58.1-618, the Department has the authority to make estimated assessments when any dealer fails to make a return, or has filed a false or fraudulent return. Pursuant to Va. Code § 58.1-631, the Department has the authority to make a jeopardy assessment (tax, penalty and interest) whenever of the opinion that collection of any sales and use tax or any amount of :sales and use tax required to be collected and paid will be jeopardized by delay. Pursuant to Va. Code § 58.1-632, the Department is empowered to issue a memorandum of lien for the collection of any delinquent tax, penalty and interest.

Pursuant to Va. Code § 58.1-626, a dealer is generally not allowed to absorb all or any part of the sales or use tax, or to relieve the purchaser of all or any part of such tax. A dealer that violates this restriction shall be guilty of a Class 2 misdemeanor.

4. Under what circumstances are out-of-state retailers and manufacturers required to register with the Tax Department?

Response:

Any out-of-state dealer (whether a manufacturer or non-manufacturer retailer) importing tangible personal property into Virginia for sale at retail in Virginia and who has sufficient activity in Virginia as described in Va. Code § 58.1-612 C, is required to register with the Virginia Department of Taxation for the collection and remittance of the Virginia retail sales and use tax.

5. If required to register but not registered, what is the penalty or sanction that can be imposed on an out-of-state retailer or manufacturer for failing to register and who imposes it?

Response:

The penalties and sanctions are the same as for any in-state dealer. Refer to the answer given to Question #3. Furthermore, with respect to out-of-state collections, it is important to be aware of Va. Code § 58.1-14, as it provides that "[a]ny state of the United States or any political subdivision thereof, shall have the right to sue in the courts of Virginia to recover any tax which may be owing to it when the like right is accorded to the Commonwealth of Virginia and its political subdivisions by such state, whether such right is granted by statutory authority or as a matter of comity."

Responsibility for Paying the Tax

1. If the party deemed responsible for paying the tax (retailer or manufacturer) does not pay, are there any circumstances under which the Tax Department would hold the other party responsible for payment (again, retailer or manufacturer); and, if so, what are those circumstances?

Response:

Although a registered dealer is legally obligated to collect the sales tax on a retail sale of tangible personal property, the ultimate tax burden rests with the consumer. For instance, a purchaser that buys modular building sections to affix to a permanent foundation is ultimately liable for paying the tax to the dealer if the dealer charges the sales tax. If the dealer does not charge and collect the sales tax, then the purchaser as the final consumer is required to report and remit the consumer use tax to the Department of Taxation.

Notwithstanding, if a registered dealer fails to collect the sales or use tax on the retail sale of tangible personal property, both the dealer and the purchaser become personally liable for the tax. Thus, in an audit of either party to the transaction, the Department may hold either the registered dealer personally liable for the uncollected sales tax or hold the purchaser personally liable for the unreported use tax. See Va. Code §§ 58.1-625 and 58.1-610.

2. Assuming there are circumstances by which the Tax Department may hold the other party responsible, how does the other party ensure the responsible party has paid the tax, i.e., other than the business relationship between them, is there any statutory or administrative authority the other party can cite or invoke to compel payment of the tax?

Response:

Pursuant to Va. Code § 58.1-625, a retailer is compelled to collect the sales tax and remit such tax to the Department or risk becoming personally liable for payment of the tax and subject to civil and criminal penalties. Also, pursuant to Va. Code § 58.1-625, any dealer who is not registered under Va. Code § 58.1-613 or is delinquent in the payment of the sales and use tax has no right in this Commonwealth to pursue an action at law or suit in equity pursuant to a sales and use tax matter. Thus, definite legal consequences apply when a registered dealer fails to comply with its sales tax collection and remittance obligations.

If no sales tax is collected by the retailer on the retail sale of tangible personal property, the purchaser should first ask the retailer why no sales tax was collected. If the retailer indicates that it is registered to collect the Virginia sales tax, then it should charge and collect the sales tax from the purchaser. If the registered retailer refuses to collect the sales tax or is not registered to collect the Virginia sales tax, then the purchaser is compelled to report and remit the Virginia use tax to the Department of Taxation.

If the purchaser is concerned as to whether the dealer has paid the tax to the Department, it may ask the dealer whether it is registered to collect the Virginia sales tax, or it may contact the Department of Taxation to confirm that the dealer is registered to collect the sales tax. As far as confirming whether the dealer actually paid the sales tax to the Department, the purchaser or lessee has no particular recourse under the Virginia Retail Sales and Use Tax Act (the "Act"). Currently, there is no provision in the Act that a purchaser could compel a retailer to collect the sales tax. However, the purchaser or lessee is not prevented from asking the dealer to voluntarily prove the remittance of the sales tax to the Department. However, the dealer does not have to disclose such information to the purchaser or lessee unless there is some other statutory provision outside the scope of the Act that would require such disclosure.

Computation of Tax

1. Is there a statutory or administrative definition of "retail sales price"? (While we note the definitions of "retail sale" and "sales price" under Va. Code § 58.1-602, there is not a separate definition for "retail sales price").

Response:

The phrase "retail sales price" appears in the first sentence of Va. Code § 58.1-610.1, as follows:

- The retail sale of a modular building, as defined by § 58.1-602, by a modular building manufacturer or modular building retailer, as defined by § 58.1-602, shall be subject to the tax authorized by this chapter upon sixty percent of the retail sales price.

In other words, the retail sale of a modular building is subject to the retail sales tax on 60% of the sales price. The phrase "retail sales price" is clearly intended to refer to the sales price of a modular building sold at retail because the statutory sentence begins with "The retail sale of a modular building." While the phrase "retail sales price" is not specifically defined in Va. Code § 58.1-602, I would note that the term "retail" modifies the term "sales price," which is defined by Va. Code § 58.1-602. Furthermore, the common definition of "retail" means a sale to consumers; in other words, a sale at retail or retail sale as defined by Va. Code § 58.1-602. Thus, the phrase "retail sales price" is intended only to refer to the sales price charged to the final taxable consumer. This intent is further demonstrated in Virginia Tax Bulletin 00-3 issued on June 20, 2000. This bulletin states in the opening paragraph the following:

- Effective July 1, 2000, the taxable base of modular buildings sold at retail will change from 100% to 60% of the sales price. A sale at retail occurs when a modular building is sold without installation to the final consumer.

The Department also prepared a Fiscal Impact Statement (FIS), copy enclosed, for House Bill 1094 (the bill introducing the proposed law change for modular buildings) to explain the intended impact of the, bill and provided the FIS to the 2000 session of the General Assembly. In discussing the new taxable base, the FIS states the following:

- This bill provides for a new taxable base on retail sales of modular buildings. The new taxable base is 60% of the sales price charged for the modular building.

Accordingly, the phrase "retail sales price" is intended to mean the sales price of a modular building sold at retail.

2. Who makes the determination of retail sales price, the retailer or manufacturer, and when in a transaction is that determination made?

Response:

The party selling the modular building at retail sets the sales price that is subject to the tax. If the manufacturer is selling a modular building at retail (i.e., a sale without installation to the consumer), the manufacturer would set the sales price of the item and should collect the sales tax from the customer, if registered to collect the sales tax. In such instances, a manufacturer is a retailer (i.e., selling to the consumer). A retailer that is not a manufacturer but sells a modular building at retail to a consumer (such as a contractor) sets the sales price and should collect the sales tax from the customer, if registered to collect the sales tax.

3. How is the retail sales price determined - what is the start point (i. e., modular home cost to manufacturer; invoice cost to retailer; contract cost to customer?); can costs and expenses be subtracted from that start point, and, if so, what kinds of costs and expenses, and are there any caps or limits on those costs and expenses?

Response:

In a retail sale That is, when a modular building is sold without installation to the consumer.
made by a manufacturer, the retail sales price is the total amount charged by the manufacturer for the modular building, including any services that are part of the sale, without any deductions for the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses 'whatsoever. Thus, the sales price is the total amount invoiced to the customer and includes, but is not limited to, the profit, overhead charges, and all associated costs involved in the cost of factory construction of the modular sections. Factory construction costs include, but are not limited to, all factory labor (e.g., design, engineering, fabrication, warehousing, etc.), managerial and administrative costs, and all other associated costs, salesmen costs, plant costs, warranties, maintenance, etc. There are no statutory caps or limits applicable to costs and expenses that comprise the retail sales price on modular buildings. Of course, the manufacturer determines all of the associated direct and indirect costs that are chargeable in connection with a particular modular building.

In a retail sale made by a retailer that is not a manufacturer, the retail sales price is the total amount charged by the retailer for the modular building, including any services that are part of the sale, without any deductions for the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever. The retail sales price would include the totals cost charged by the manufacturer for the modular building sections, as well as, any other costs and expenses associated with the sale at retail and chargeable by the retailer to its retail customer for the particular building.

When a modular building is sold at retail, the retail sales tax is imposed on 60% of the sales price in accordance with Va. Code § 58.1-610.1. In a retail sale, a separately stated transportation charge (i.e., the charge for transporting a modular section to the consumer) may be excluded from the sales tax. For further details, see Title 23 VAC 10210-6000. Combining handling charges with the transportation charge will render the shipping and handling charge taxable.

4. Assuming the costs and expenses may be subtracted from the start point, are there any costs and expenses that cannot be subtracted, and, if so, which ones and why?

Response:

As previously stated, generally no costs or expenses of a retail sale are deductible from the sales price for computing the sales tax on tangible personal property, including modular buildings as defined in Va. Code § 58.1-602. See Response to Question #3 in the Computation of Tax section above. The only costs that are deductible from sales price are those that are allowed by statute. In this instance, a separately stated transportation charge (i.e., the charge for transporting the modular sections to the consumer) may be excluded from the sales tax pursuant to Va. Code § 58.1-609.5 3.

5. Who pays the sales or use tax, retailer or manufacturer, and when during a transaction is the sales or use tax paid to the Tax Department?

Response:

The Virginia retail sales and use tax is ultimately paid by the consumer, i.e., the person who buys a modular building to affix to a permanent foundation. In a retail sale, the retailer's customer is the consumer. Thus, the consumer in a retail sales transaction may be a real property construction contractor that buys a modular building from a modular building manufacturer or a modular building retailer (as those terms are defined by Va. Code § 58.1-602) to install on a permanent foundation. The consumer may also be a modular building retailer who buys a modular building from a modular building manufacturer and has contracted to furnish and install such building for a third party.

Any registered dealer that sells tangible personal property (including a modular building) at retail is responsible for the collection of the sales tax from the consumer and the remittance of it directly to the Virginia Department of Taxation. Every dealer required to collect and remit the sales tax is required to file a return on or before the twentieth day of the month following the month in which the sales tax becomes effective. This reporting requirement is set out in Va. Code § 58.1-615. If the sales tax is not collected upon the retail sale of a modular building, the consumer must report and remit the consumer use tax on or before the twentieth day of the month following the month in which the use tax becomes effective.

No retail sale of a modular building is made when a modular building manufacturer contracts to furnish and install a modular building. In such instances, the modular building manufacturer is the consumer and thus must pay the sales or use tax in accordance with the special rules set out in Title 23 VAC 10-210-410 D or E.

When a modular building manufacturer is engaged exclusively as a consumer, the tax must be paid on the cost price of the raw materials or prefabricated components that are to be incorporated into the modular building. Generally, the tax must be paid at the time of purchase to all suppliers who are authorized to collect the sales tax. In instances where the supplier is not authorized to collect the sales tax or fails to collect the sales tax, the modular building manufacturer must report and remit the consumer use tax directly to the Department of Taxation on Form ST-7, Consumer's Use Tax Return, on or before the twentieth day of the month following the month of purchase. This is consistent with the policy set out in Title 23 VAC 10-210-410 D.

When a modular building manufacturer is both a consumer and a retailer, it needs to abide by the special rules set out in Title 23 VAC 10-210-410 E for dual capacity fabricators. The time of payment of the sales or use tax is generally due on or before the twentieth day of the month following the month in which the sales or use tax becomes effective.

When a contractor buys a modular building at retail, but the seller (whether a manufacturer or a non-manufacturer retailer) fails to collect sales tax on the sale, the contractor is the final consumer and is thus directly liable for the consumer use tax. As such, it must report and pay the consumer use tax to the Department on or before the twentieth day of the month following the month in which the item was purchased.

6. How is the sales or use tax disclosed in a transaction - should the tax be included in the modular home's cost; should the tax be shown as a separate line item on the sales contract; what tax information is provided to the customer?

Response:

In a retail sale of a modular building, the amount of the tax must be separately stated on the customer's invoice. See Va. Code § 58.1-625 and Title 23 VAC 10-210-340.

When a contractor furnishes and permanently, installs a modular building, it should not separately state the amount of the tax on the invoice or contract given to the customer. Rather, it should take the tax into consideration when submitting bids for a job like any other expenses associated with the transaction. However, if an itemized cost statement is furnished to the customer with the amount of tax disclosed to the customer, such disclosure should reference that the tax amount only applies to the contractor's costs of materials and should not be mistaken as a sales tax collection.

When the contractor is also the modular building manufacturer or the modular building retailer and enters into a transaction to furnish and permanently install a modular building, no sales tax is charged to its customer. Rather, such contractor is treated like any other contractor and applies the tax as noted in the preceding paragraph. For further information on tax application, see P.D. 00-109 [VTB 00-3 (6/20/00)].

CONCLUSION

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and public documents cited 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 ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1868481503.R

Rulings of the Tax Commissioner