09-51 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Retailer vs Real property contractor

Topic

Manufacturing Exemption

Responsible Officer

Sale for Resale

Tangible Personal Property

Date Issued

05-01-2009

May 1, 2009

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

Dear *****:

This will reply to your letter in which you seek correction of an assessment issued to ***** (the "Taxpayer") and ***** (the "Individual") for the period September 2003 through December 2004. I apologize for the delay in responding to you.

FACTS

The Taxpayer fabricates, sells and installs signs. The Taxpayer was audited by the Department and treated as a real property contractor with respect to its sale and installation of signs. The Department assessed use tax on the Taxpayer's purchase of materials, supplies and equipment used to fabricate and install signs. The Taxpayer contends the Department has misinterpreted the Code of Virginia, and the sales tax regulations and policies for sign businesses are erroneous. The Taxpayer maintains that the signs it sells and installs remain tangible personal property after installation. Therefore, the Taxpayer asserts it should be treated as a retailer rather than a real property contractor. Accordingly, the manufacturing and resale exemptions would then apply to the Taxpayer's purchases of equipment and tools used to fabricate the signs and to they materials that become a component part of the signs.

The Taxpayer also maintains that the business assessment was erroneously converted to the Individual as a responsible officer of the corporation under Va. Code § 58.1-1813, and that the business assessment was not assessed in a timely manner.

DETERMINATION

Retailer versus Real Property Contractor

The Department's policy for sign businesses that was in effect at the time of this audit is well founded and longstanding. The policy is based on Title 23 of the Virginia Administrative Code (VAC) 10-210-4070 A, which states, "Any person who constructs and installs signs, billboards or similar items which, upon installation, become incorporated into realty is a contractor with respect to such items." The regulation is based on the provisions of Va. Code § 58.1-610 A, which states:

- Any person who contracts ... to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption.

In further support of the Department's policy are the Virginia Supreme Court's decisions in Danville Holding Corp. v. Clement, 178 Va. 223 (1941) and Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970). In determining whether a tangible item becomes realty upon installation, the Department has relied upon three general tests adopted by the Court in these cases. They are (1) annexation of the property to the 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. In Danville Holding, the Court concluded that "the intention of the party making the annexation is the paramount and controlling consideration."

The Department's policy of treating the sale and installation of signs as real property transactions has been upheld in a number of determinations by the Tax Commissioner, such as Public Document (P.D.) 92-93 (6/5/92). This document concludes that a business that purchases a sign expects to be a going concern and intends for the sign to remain part of the real property for the life of the business. Thus, business signs that are attached to or become part of the realty upon installation are properly treated as real property for purposes of the sales and use tax. More recently, the Department issued P.D. 07-111 (7/19/07), which discusses the treatment of identification signs hung on buildings. This determination states that the signs at issue were real property based on the manner in which the signs were constructed, the manner in which the signs were attached to the building and the signs' adaptation to the use of the building.

For this audit period, the Department's treatment of the Taxpayer as a real property contractor is consistent with the regulation on sign businesses, the court cases and the statute cited above. Therefore, I must conclude that the Department's audit assessment is correct with respect to this issue.

Manufacturing Exemption

The Taxpayer contends it qualifies for the manufacturing exemption on its purchase of equipment and tools used to fabricate signs. Title 23 VAC 10-210-410 F explains that the manufacturing exemption is not available to contractors that primarily fabricate or manufacture tangible personal property for their own use or consumption. This regulation is based on Va. Code § 58.1-609.3 2, which stipulates that the manufacturing exemption applies to manufacturing activities conducted for sale or resale. As a real property contractor, the Taxpayer conducts manufacturing activities primarily for its own use or consumption and not for sale or resale. Thus, the manufacturing exemption does not apply to machinery, tools and other equipment used by the Taxpayer to fabricate signs. The Taxpayer was properly assessed use tax in the audit on items purchased for use in fabricating signs.

Assessment Not Timely Assessed

The Taxpayer asserts that the assessment was not timely assessed as required under Va. Code § 58.1-634, which states in part, "[t]he taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable." Virginia Code § 58.1-615 requires the filing of sales and use tax returns on a monthly basis. Generally, returns are due on or before the twentieth day of the month following the close of each calendar month filing period. The Department's records indicate that the assessment at issue is dated November 17, 2006. The audit covers a span of monthly periods beginning September 2003 and continuing through December 2004. The Taxpayer's sales tax return for the September 2003 period was due on or before October 20, 2003. Based on the statutes cited, this period was assessed outside the three-year statute of limitations. The remaining periods in the audit were assessed timely. The assessment will be adjusted to reflect the removal of the September 2003 period from the audit.

Assessment Converted to Responsible Officer

The Taxpayer also contests the conversion of the business assessment to a principal officer of the corporation. Based on a review of the Department's records, the business assessment was not converted or issued to this individual. I understand that a member of my staff has previously communicated this to you.

Law Change Affecting Sign Manufacturers

The 2005 Virginia General Assembly enacted legislation that changed the definition of tangible personal property in Va. Code § 58.1-602 to include manufactured signs. This change became effective July 1, 2005. Beginning on the effective date of this legislation, the Taxpayer is deemed a retailer, not a real property contractor, with respect to its sales and installation of signs. The Taxpayer is eligible for the resale exemption on purchases of tangible personal property that becomes a component part of signs fabricated for resale. The manufacturing exemption also applies to machinery, tools, equipment and other items used directly by the Taxpayer to manufacture signs. The Taxpayer should refer to the Department's manufacturing regulation, Title 23 VAC 10-210-920, for further information on the manufacturing exemption.

CONCLUSION

The audit will be revised to remove the September 2003 period from the audit period. The Department's records indicate the audit assessment has been paid in full. Any resulting overpayment from the audit revision will be refunded to the Taxpayer with applicable interest.

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, 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 concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1215641032S

Rulings of the Tax Commissioner