Document Number
08-98
Tax Type
Retail Sales and Use Tax
Description
Is taxpayer as a using and consuming contractor or a retailer of counter tops
Topic
Classification
Manufacturing Exemption
Date Issued
06-18-2008


June 18, 2008








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

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period October 2002 through January 2005. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer fabricates counter tops for installation on kitchen and bathroom cabinetry and treats itself as a retailer with respect to the collection and payment of the sales and use tax. Based on established policy, the Department's auditor determined that the Taxpayer is a real property contractor of counter tops. Thus, in accordance with established policy, the auditor assessed consumer use tax on all purchases of materials, supplies, equipment and software used or consumed in the Taxpayer's business.

At issue is the treatment of the Taxpayer as a using and consuming contractor rather than a retailer of counter tops. The Taxpayer requests treatment as a retailer in accordance with subsection G of Title 23 of the Virginia Administrative Code (VAC) 10-210-410. The Taxpayer contends that it satisfies the definition of retailer by installing counter tops and maintaining a wholesale place of business and an inventory of counter top materials. The Taxpayer also contends that counter tops are like or comparable to cabinets, which are specifically subject to this regulation. As a retailer of counter tops, the Taxpayer asserts that it should not be denied the manufacturing exemption. For these reasons, the Taxpayer contends that the assessment is erroneous, unfair and contrary to the Taxpayer's original registration.

DETERMINATION


Retailer v. Consuming Contractor

Virginia Code § 58.1-610 (D) is interpreted by subsection G of Title 23 of the Virginia Administrative Code ("VAC") 10-210-410, which provides, in part, the following:
    • A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings (as distinguished from floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items is not classified as a using or consuming contractor with respect to them.
    • For purposes of this subsection only, a "retailer" shall be deemed to be any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items. As so defined, a retailer is not classified as a using or consuming contractor with respect to installations of the aforementioned items. A retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt from the tax. [Emphasis added.]

The Department has long held that counter tops are not subject to the above retailer classification rules because counter tops are not like or comparable to cabinets or any of the other items listed in the above regulation. See Public Document (P.D.) 96-111 (5/31/96) and 00-83 (5/16/00). Cabinets generally are enclosures with doors, shelving and compartments and, therefore, are not akin to counter tops that are generally flat surfaces similar to table tops. Although a cabinet may aid in supporting a counter top, a counter top is clearly not an enclosure of any sort.

I would further note that the courts have applied the doctrine of ejusdem generis "when items with a specific meaning are listed together in a statute, and are followed by words of general import, the general words will not be construed to include matters within their broadest scope but only those matters of the same import as that of the specific items listed." See the opinion of Calcium Chloride Sales, Inc. v. Virginia Department of Taxation, Case No. LT-2270 (2006), Circuit Court of the City of Richmond citing Kappa Sigma Fraternity, Inc. v. Kappa Sigma Fraternity, et al., 266 Va. 455, 470 587 S.E.2d 701, 710 (2003). Based on this doctrine, subsection G of the above cited regulation does not apply to the Taxpayer's counter top business.

Furthermore, the treatment of the Taxpayer as a retailer for the audit period does not appear to be beneficial to the Taxpayer. Three sales invoices (copies enclosed) furnished by the auditor show that the Taxpayer charged sales tax on counter top materials, sinks and faucets but exempted lump-sum charges for fabrication and installation labor and exempted charges for edging and cutouts in the counter top materials (basically, fabrication charges). In a retail transaction, fabrication labor is fully taxable based on the fabrication regulation at Title 23 VAC 10-210-560. Further, combining taxable labor with exempt labor into a lump­sum charge renders the entire charge taxable. Pursuant to Va. Code § 58.1-609.5(2), installation labor is only exempt if it is separately stated on the invoice, but the invoices reviewed show that installation labor was not separately stated. Thus, even if it were possible to treat the Taxpayer as a retailer of counter tops that are furnished and installed, it would still be liable for the uncollected sales tax on fabrication charges, including all lump­sum charges for fabrication and installation. Potentially, the liability from an audit as a retailer would exceed the current liability derived as a contractor.

Manufacturing Exemption

In regard to the manufacturing exemption, subsection F of Title 23 VAC 10-210-410 provides the following:
    • Fabricators of tangible personal property may take the status of industrial manufacturers, processors or miners under 23 VAC 10-210-920 or 23 VAC 10­210-960 and when they fabricate tangible personal property for sale or resale, they may enjoy the production exemptions set out in 23 VAC 10-210-920 or the mining exemptions set out in 23 VAC 10-210-960. The production and mining exemptions are not available to a fabricator of tangible personal property who fabricates for his own use or consumption (as a contractor or otherwise) and not for sale or resale. However, a fabricator whose principal or primary business is the fabrication of tangible personal property for sale or resale, and who, as a lesser or minor part of this business, fabricates for his own use and consumption, will not be deprived of the production exemptions set out in 23 VAC 10-210-920, or the mining exemptions set out in 23 VAC 10-210-960.

I understand that virtually all of the transactions conducted during the audit period were for the fabrication and installation of counter tops. As such, the Taxpayer is principally fabricating for its use or consumption. In accordance with the above regulation, the Taxpayer is not entitled to the manufacturing exemption.

Department Advice

With respect to the claim that the assessment is unfair and contrary to the Taxpayer's original registration, the application of the tax with respect to counter tops was clearly established and published prior to the start of the Taxpayer's sales and use tax registration in 2002. For example, the two public documents cited above clearly predate the audit period. Furthermore, in accordance with Va. Code § 58.1-1835, the Taxpayer has provided no written evidence that the Department incorrectly advised the Taxpayer on how to apply the tax. Based on the foregoing and absent a written ruling or written advice to the contrary, the Taxpayer should have operated as a contractor and generally paid the sales and use tax on the cost price of its materials. For further information on how to correctly apply the tax when principally fabricating tangible personal property for use or consumption in real property construction contracts, see subsection E of Title 23 VAC 10-210-410.

CONCLUSION


Based on this determination, the assessment is correct. An updated bill or statement, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill or statement date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on part of the tax due under the terms of Virginia's recent Amnesty. See the enclosure entitled "Important Payment Information."

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 determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner



AR/1-803086005.R


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46