Document Number
09-142
Tax Type
Retail Sales and Use Tax
Description
No back-up documentation provided to show computation of consumer use tax liabilities
Topic
Assessment
Computation of Tax
Records/Returns/Payments
Tangible Personal Property
Date Issued
09-29-2009


September 29, 2009




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 February 2004 through June 2007.

FACTS


The Taxpayer is located outside Virginia and sells precast foundation wall panels with or without installation. For the audit period, the Taxpayer principally fabricated for its use or consumption. An audit resulted in the assessment of sales tax on retail sales of panels sold without installation but delivered to Virginia customers in which another state's tax was erroneously applied. For panels sold with installation by the Taxpayer, the sales price of such panels and set up fees were included in the audit only because the Taxpayer failed to provide back-up documentation to show how it computed its consumer use tax liabilities during the audit period. The auditor, however, gave a credit for the consumer use tax paid on the raw materials used in these installed sales. Thus, the difference between the sales price of installed panels and the cost price of such panels was assessed in the audit.

The Taxpayer contends that it has remitted the correct amount of Virginia sales and use tax based on the cost price of raw materials that make up the fabricated property and has thus complied with the provisions of Title 23 of the Virginia Administrative Code (VAC) 10-210-410 E.

DETERMINATION


Dual Role Fabricator

The Taxpayer contends that it operates in a fashion similar to the steel fabricator in Public Document (P.D.) 89-117 (4/10/89), the kitchen cabinet contractor in P.D. 01-­60 (5/15/01), and the counter top business in P.D. 07-108 (7/6/07). These rulings apply the tax based on the primary purpose rules set out in Title 23 VAC 10-210-410 E. Because the Taxpayer is principally fabricating tangible personal property for its use or consumption, the Taxpayer maintains that these primary purpose rules only require that it remit or pay tax based on the cost price of tangible personal property.

When a person principally fabricates tangible personal property for use or consumption, Title 23 VAC 10-210-410 E sets out the following:
    • Any person who is principally fabricating tangible personal property for his own use and consumption in real property construction contracts shall apply the tax according to subsection D above.1 In addition, persons who sell tangible personal property to consumers must register, collect, and pay the tax on the retail selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible personal property which can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to his supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions. [Footnote added.]

Given that the Taxpayer is both a retailer and contractor, the regulatory provisions cited above do not allow the Taxpayer to pay tax based only on the cost price of materials because it is not entirely fabricating for its use or consumption. Rather, a closer reading of the regulation shows that the application of the tax depends upon the nature of each transaction. For instance, if the transaction is for the retail sale of tangible personal property (e.g., panels sold without installation) to Virginia customers, the Taxpayer must collect the Virginia retail sales tax based on the sales price of the panels. If the transaction is for real property construction services (e.g., panels sold with installation by the Taxpayer or someone hired by the Taxpayer), the Taxpayer is liable for the Virginia retail sales or use tax based on the cost price of raw materials incorporated into the realty. Separately stated transportation charges are exempt from the tax. See Va. Code § 58.1-609.5 3 and Title 23 VAC 10-210-6000.

Sales Without Installation

In this group of sales, it is my understanding that the Taxpayer erroneously collected another state's sales tax on panels sold to a separately incorporated sister company located in Virginia. It is my understanding that the Taxpayer did not install the panels in these transactions. Rather, the Taxpayer's sister company was the installer of the panels, which became affixed to realty upon installation. Accordingly, the transactions between the Taxpayer and its sister company were sales at retail2 and subject to the Virginia sales and use tax based on the sales price of the items sold by the Taxpayer.

Because the sister company was the one affixing the panels to realty, it is considered a consuming contractor pursuant to Va. Code § 58.1-610 A. In such instances, the resale exemption is not applicable to the purchase of panels from the Taxpayer. Furthermore, panels sold at retail and delivered by the Taxpayer to its sister company or to other consuming contractors in Virginia constitute sales in interstate commerce.3 As such, these sales are not taxable in the Taxpayer's state (the state of origin) but are taxable in Virginia (the state of destination). Because the Taxpayer is a Virginia dealer registered to collect the Virginia retail sales and use tax, it should have charged and collected the Virginia retail sales tax on the sales price of the panels sold at retail and delivered without installation to its sister company in Virginia. For these reasons, I find that the auditor correctly held these panel sales in the audit.

Because of the Taxpayer's erroneous collection of another state's tax for the retail sales at issue, no credit can be allowed against the Virginia sales tax assessed in the audit. See Title 23 VAC 10-210-450.

Sales With Installation

Set-up fees. The audit includes installed sales consisting of lump-sum charges for panels and set-up fees. These installed sales transactions are for real property construction services and thus do not constitute retail sales of tangible personal property. For real property, construction services performed in Virginia, the Taxpayer is deemed a consuming contractor pursuant to Va. Code § 58.1-610 A and is liable for the Virginia sales or use tax on the cost price of all construction materials used or consumed in Virginia.4 Because the set-up fees are not part of the cost price of the materials used to compute the Taxpayer's consumer use tax liability, they should not have been included in the audit and may be removed from the audit provided the Taxpayer furnishes documentation listing the specific amounts charged for set-up fees with respect to each installed sales transaction held in the audit.

Consumer use tax liability. I understand that the Department's auditor requested documentation to determine how the Taxpayer computed its Virginia consumer use tax liability during the audit period. Because insufficient documentation was furnished, the auditor was not able to verify whether the Taxpayer filed accurate returns for the audit period. Therefore, pursuant to Va. Code § 58.1-618, the auditor estimated the Taxpayer's consumer use tax liability for the audit period based on the available information.

Pursuant to Va. Code § 58.1-633, the Taxpayer must maintain suitable records to show that it paid the Virginia sales tax to vendors or remitted the Virginia consumer use tax to the Department based on the cost price of the tangible personal property used or consumed in Virginia.5 Furthermore, Virginia Code § 58.1-205 1 deems any tax assessment issued by the Department as prima facie correct. This means that the burden of proof is upon the Taxpayer to show that the assessment is incorrect.

In the absence of records to verify the Taxpayer's consumer use tax liability, Taxpayer has not met the burden of proof required by the statute. Accordingly, the installed sales (minus set-up fees) must remain in the audit, unless the Taxpayer furnishes back-up records to fully substantiate the Taxpayer's consumer use tax liabilities incurred during the audit period.

CONCLUSION


Based on this determination, the audit may be revised provided the Taxpayer furnishes the requested documentation to the auditor within 45 days of the date of this letter. The auditor will contact the Taxpayer soon to arrange for the receipt of such documentation. If the documentation is received within the time allotted and is found acceptable for adjustment, the audit will be revised in accordance with this determination.

A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill 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 *****.

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 Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                  Tax Commissioner




AR/1-3082785416.R
1. Subsection D provides that the Virginia sales or use tax must be paid on the cost price of raw materials that are incorporated into the realty.
2. Pursuant to Va. Code § 58.1-602, a "sale at retail"or "retail sale" means "a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter... "
3. See Title 23 VAC 10-210-780.
4.The resale exemption is not applicable to construction materials.
5. A credit may be allowed only for sales or use taxes legitimately owed and paid to another state on such used or consumed property provided it does not exceed the Virginia sales or use tax due. No credit is allowed for tax paid erroneously or incorrectly paid to other states. See Title 23 VAC 10-210-450. For the real property construction services performed in Virginia during the audit period, there is no indication in the Taxpayer's appeal or elsewhere that it legitimately paid another state's sales tax in connection with the construction materials used or consumed by the Taxpayer in Virginia.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46