Document Number
08-154
Tax Type
Retail Sales and Use Tax
Description
Use tax on materials installed or erected for Virginia real property construction projects
Topic
Credits
Exemptions
Tangible Personal Property
Date Issued
08-29-2008


August 29, 2008




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

Dear *****:

This will reply to your letter in which you seek correction of the use tax assessment issued to ***** (the "Taxpayer"), for the audit period January 2004 through December 2006.

FACTS


The Taxpayer operates a steel and metal fabrication plant outside Virginia. In addition to the fabrication of steel and other metals, the Taxpayer also installs the fabricated materials in Virginia real property construction projects. As a result of the Department's audit, the Taxpayer was held liable for the use tax on materials installed or erected for Virginia real property construction projects.

The Taxpayer contends that the materials used in its government construction projects are not taxable on the basis that such property is exempt from taxation under the governmental exemption provided in Va. Code § 58.1-609.1. The Taxpayer also contends that it has not been allowed to take a bad debt credit on transactions with its customers. In addition, the Taxpayer raises other issues relating to exemption from the tax and credit for taxes paid to another state. The Taxpayer seeks an adjustment of the Department's assessment.

DETERMINATION


Government Exemption

The Taxpayer listed numerous jobs in which the Taxpayer contends it made purchases for which the government exemption was not allowed by the Department's auditor. Title 23 of the Virginia Administrative Code (VAC) 10-210-693 provides in pertinent part:
    • When a contractor contracts with a governmental entity to perform construction or reconstruction with respect to real property, and in connection with this real property contract, agrees to furnish tangible personal property for use in real estate construction, the contractor shall be deemed to have purchased such tangible personal property for use and consumption and shall be liable for the sales and use tax on such tangible personal property.
    • Nothing in this regulation shall be construed to authorize the application of the true object test to real property contracts with government entities. A real property contractor is taxed on the cost price of any construction or installation supplies used or consumed in the performance of real property construction, installation or repair, regardless of whether the true object of the contract or order is for services or the sale of tangible personal property. Construction and installation supplies shall include, but not be limited to, structural steel, concrete, conduit, wiring, cabling, nuts, bolts, anchors, screws, nails, glue and other materials used or consumed by a government contractor in fulfilling a contract with any government entity. Nothing in this regulation shall be construed to exempt from the retail sales and use tax materials, equipment, or other tangible personal property purchased by a contractor for use in real property construction contracts with a government entity, regardless of whether title to such property passes directly to the government entity upon purchase by the contractor or if the contractor is reimbursed directly by the government entity for the cost of such property.

In this instance, the jobs listed by the Taxpayer involved tangible personal property that was used or consumed by the Taxpayer in real property construction contracts. In accordance with the regulation; the tax was properly assessed. The auditor commented, however, that there were several jobs for which the auditor could not determine if tangible personal property was used or consumed. If the Taxpayer can provide which line items correlate to jobs numbered 2203, 2704 and 5104, I will have the Department's auditor review the related tangible personal property items to determine if the property is properly taxable or if there is cause to remove them from the audit.

Bad Debt Credit

The Taxpayer questions if a credit for bad debts is allowable with regard to several jobs listed in its appeal. Virginia Code § 58.1-621 addresses bad debts as it applies to the retail sales and use tax and it states, in part, "the dealer may credit, against the tax shown to be due on the return, the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless within the period covered by the return." Title 23 VAC 10-­210-160 sets forth the Department's interpretation of this regulation and states, "Any dealer may obtain a credit for the amount of any sales or use tax previously reported and paid on a return for account; found to be worthless. Such credit must be claimed on the return filed for the period in which the account is determined to be worthless."

As provided above, in order to claim a retail sales and use tax credit on a bad debt resulting from a Virginia transaction, the person claiming the debt must be a registered Virginia dealer, and the credit referred to in Va. Code § 58.1-621 applies to tax collected from a customer to whom tangible personal property was sold and which was previously remitted to the Department. In this instance and with regard to the jobs listed, the Taxpayer has not collected the tax on any sales and previously remitted that tax to the Department. The Taxpayer is a using and consuming contractor and not a dealer. Accordingly, I do not find cause for the allowance of any credit for bad debts.

Account 1706

The Taxpayer contends that certain property was temporarily stored in Virginia for subsequent use outside of Virginia and Virginia Code § 58.1-609.3 1 specifically exempts such property.

Title 23 VAC 10-210-410 i interprets the exemption provided under Va. Code § 58.1-609.3 1 and states, in part, the following:
    • Construction contractors may purchase exempt from tax construction materials for temporary storage in Virginia to be used in exempt construction projects in other states or foreign countries.

The second paragraph of this regulation continues as follows:
    • This exemption is restricted to construction materials incorporated into exempt real property construction. The tax applies to equipment, tools, supplies, etc., used in performance of the construction contract. The tax applies to all other construction materials, temporarily stored in Virginia, that will be incorporated into real estate construction projects outside Virginia.

The regulation clearly limits the exemption to real property construction work and provides that the temporary storage exemption has no application to other sales and use tax exemptions, i.e., the resale exemption. This sale represented the sale of tangible personal property to a customer who picked up the property at the Taxpayer's Virginia location, and the Taxpayer did not have an exemption certificate on file. Accordingly, the temporary storage exemption does not apply in this instance, and I find no basis for an adjustment to the assessment.

Credit for Tax Paid to Another State

The Taxpayer contends that a credit for taxes paid to another state was denied by the Department's auditor. Title 23 VAC 10-210-450 explains that such a credit applies to taxes paid to the state from which the property was purchased, or if the tax was legitimately imposed because of a taxable use in another state prior to the delivery and use of the property in Virginia. The regulation 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. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-­state tax, no credit is available. The purchaser must apply to the out-of­-state seller for refund. (Emphasis added).

The Taxpayer did not cite specific line item exceptions in its appeal. If there are exceptions that adhere to the requirements set out in the foregoing regulation, the Department's auditor will review such exceptions to determine if a credit is applicable.

CONCLUSION


Based on the foregoing discussion, if the Taxpayer provides the additional information, the Department's auditor will revise the audit as warranted. I will allow the Taxpayer 30 days from the date of this letter to provide the requested information for the auditor's review. If the requested information is not made available or does not meet the requirements set out in the Code of Virginia sections or regulations cited in this determination, the Department's assessment will be upheld. The bill will be updated to include accrued interest and should be paid within 30 days of the bill date to avoid the accrual of additional interest.

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 matter, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner



AR/1-1958969885.Q


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46