Tax Type
Retail Sales and Use Tax
Description
Taxpayer's classification was changed from contractor to retailer
Topic
Classification
Tangible Personal Property
Date Issued
05-05-2009
May 5, 2009
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your correspondence requesting correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period May 2002 through April 2008. I apologize for the delay in responding to your letters.
I regret that you are dissatisfied with the conduct and closure of this audit. The Department is committed to providing a high level, of service to its customers and attempts to treat everyone with the professionalism and competence they deserve. I regret you feel you were not treated appropriately and can assure you that was not the intent of the audit staff. Thank you for sharing this information with me.
FACTS
The Taxpayer sells and installs cabinets. As a result of the audit, the Taxpayer's classification was changed from contractor to retailer in accordance with the three-prong retailer test set out in Title 23 Virginia Administrative Code (VAC) 10-210-410 G.
The Taxpayer challenges this classification change and contends that it does not satisfy the place of business and inventory criteria of the retailer test. In this regard, you state that the Taxpayer does not maintain a showroom. The Taxpayer also contends that it holds materials on site that are dedicated to specific, on-going jobs but does not maintain a general open inventory. In other words, the Taxpayer contends that it buys cabinet materials on a job-by-job basis. The Taxpayer also contends that it was previously informed by the Department that it should operate as a contractor.
DETERMINATION
Retailer Test
Virginia Code § 58.1-610 addresses the application of the tax to real property contractors. Section D of this statute sets out an exception to the general contractor rule:
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- Tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section. Any person selling fences, Venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items, shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items. [Emphasis added.]
For purposes of the above exception to the general contractor rule, a retailer is defined in Title 23 VAC 10-210-410 G, as follows:
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- 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 tax.
This regulation also provides that "[p]ersons who are not classified as retailers within the definition set forth above and who sell and install ... [cabinets] ... are deemed to be contractors and must pay the sales tax on such items at the time of purchase." Accordingly, the only persons who would be treated as a contractor of cabinets would be those persons who do not maintain a place of business or an inventory of cabinets (or materials or components parts of cabinets), or who perform installation only (i.e., installation that is not incidental to the sale of cabinets).
I understand that the Taxpayer performs installation of cabinets. In regard to the retail or wholesale place of business criteria, such phrase is defined in Title 23 VAC 10-210-2070 A to mean "the business location in Virginia that first takes the purchaser's order, either in person, by purchase order or by letter or telephone, regardless of the location of the merchandise or the point of acceptance of the order or shipment." Also, section B of the above regulation states, "The term 'place of business in Virginia' includes, but is not limited to, a store, a sales or other office or any warehouse." As such, there is no showroom requirement. Rather, the retailer definition set out in Title 23 VAC 10-210-410 G merely requires the existence of a retail or wholesale place of business. I understand that sales orders are taken and accepted at the Taxpayer's business location. Thus, the Taxpayer appears to satisfy the "place of business" requirement.
The only remaining question is whether the Taxpayer maintains a sufficient inventory of cabinets or cabinet making materials as to constitute an inventory for purposes of the retailer test noted above. The Taxpayer contends that it does not maintain such an inventory. Instead, the Taxpayer asserts that it has only working capital bought on a job-to-job basis. It is my understanding, however, that during the initial audit conference the Taxpayer informed the Department's auditor that materials were not purchased for specific projects but purchased in bulk.
The term "inventory" is not defined by the Virginia Retail Sales and Use Tax Act, nor is it defined in the regulations applicable to the retail sales and use tax. Accordingly, the common meaning of inventory is used. The term "inventory" means, "The supply of goods and materials on hand: stock." The term "stock" means, "A supply gathered for future use: store." Webster's II New College Dictionary (1995, pages 583 and 1085). The term "inventory" is also defined as "a business's raw materials, works-in-progress, and finished products." Black's Law Dictionary (Eighth Edition, 2004, p. 844).
Furthermore, in P.D. 97-315 (7/30/97), the Tax Commissioner determined that component parts constitute an inventory when most of the parts necessary to fabricate the finished product are maintained. In contrast, P.D. 88-270 (10/14/88) holds that materials purchased on a job-by-job basis generally do not constitute an inventory for purposes of the special regulation set out in Title 23 VAC 10-210-410 G. However, materials purchased on a job-to-job basis may still constitute an inventory if most of the materials needed to fabricate the finished product are maintained. Thus, for purposes of the special regulation set out by Title 23 VAC 10-210-410 G for cabinets, an inventory is the stock of cabinets maintained, or a stock consisting of most of the cabinet materials needed to fabricate the finished product and kept on hand for future use.
Although the Taxpayer claims that materials were purchased on a job-by-job basis, the Department's auditor found no evidence of such practice. I understand the Taxpayer failed to preserve any purchase invoices for the entire audit period. Such documentation coupled with information obtained on customer orders would have aided in verifying the Taxpayer's contention of bulk purchasing. However, in the absence of such documentation, the Department's auditor relied upon the best available information and evidence. For instance, I understand the Taxpayer initially told the auditor that orders of materials are used for more than one job because buying in bulk is less expensive than buying by the job. The Taxpayer has submitted no evidence to substantiate its contention of purchasing on a job-by-job basis. For this reason and the fact that the statute treats persons who sell and install cabinets as retailers, I find no basis to overturn the retailer classification concluded by the auditor.
Notwithstanding the above, I will allow the Taxpayer a final opportunity to provide documentation regarding its purchase of materials. If the Taxpayer can demonstrative by clear evidence that it purchases materials on a job-by-job basis only and not in bulk for more than one job, I will reconsider the classification of the Taxpayer as a retailer. If sufficient documentation is not provided within 30 days from the date of this letter, the Taxpayer's classification as a retailer will stand and the assessment will be upheld as issued.
Recordkeeping
To avoid this issue in the future, the Taxpayer is advised to abide by the above recordkeeping requirement, as well as the recordkeeping requirements set out in Title 23 VAC 10-210-470. Virginia Code § 58.1-633 A provides the following recordkeeping requirement:
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- Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of accounts as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
Because the Taxpayer lacked the required records and failed to file any sales and use tax returns during the entire audit period, the Department estimated the tax liability for the audit in accordance with Va. Code § 58.1-618. Such estimated assessment is deemed prima facie correct. This means that the burden is upon the Taxpayer to prove via its books and records that the assessment is incorrect.
Prior Advice by the Department
Virginia Code § 58.1-1835 states, "The Tax Commissioner shall abate any portion of any tax, interest, and penalty attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity ...." [Emphasis added.] In the instant case, you state that Department personnel provided advice by telephone that the Taxpayer should be classified as a contractor. My concern with the verbal information that the Taxpayer received is that it is often difficult to determine what specific questions were asked and what facts regarding the Taxpayer's business activities were presented to the Department. Under these circumstances, it is impossible to determine whether adequate information was provided to the Department. As such, the Tax Commissioner is not required to abate the assessment based on verbal advice.
CONCLUSION
Based on this determination, the assessment is upheld. However, I will allow the Taxpayer 30 days from the date of this letter to provide additional documentation relating to the inventory issue. The information should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P. O. Box 27203, Richmond, Virginia 232617203, Attention: *****.
If additional information is not submitted within the allotted time, an updated 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 *****.
If payment of the assessment causes a financial hardship, the Taxpayer may submit an offer in compromise based on doubtful collection using the Department's Form OICBUS, which is available on-line at www.tax.virginia.gov in the Business Forms section of the Department's website. If you have any questions about completing such an offer, please contact the Department's Collection Section at *****.
The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the 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 *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-2587516039. R
Rulings of the Tax Commissioner