Tax Type
Retail Sales and Use Tax
Description
Taxpayer was correctly classified as a using and consuming real property contractor
Topic
Classification
Exemptions
Date Issued
03-26-2010
March 26, 2010
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period September 2004 through October 2006. I apologize for the delay in the Department's response.
FACTS
The Taxpayer fabricates and installs granite and marble countertops for sale with or without installation. The Taxpayer also sells some countertop supplies and accessories. The Department audited the Taxpayer and issued an assessment for sales tax on untaxed retail sales and for sales tax that was collected but not remitted to the Department. Use tax was assessed on purchases of fabrication machinery and equipment, tools, countertop slabs, various installation supplies and other items used in the Taxpayer's business. The Taxpayer contests all items assessed in the audit.
Based on the Department's current policy, the auditor determined that the Taxpayer was primarily fabricating countertops for its use or consumption in real property construction contracts. The Taxpayer contends that countertops do not become part of real property when installed and that transactions involving the sale and installation of countertops are retail sales. Thus, the Taxpayer disputes its treatment in the audit as a real property contractor and maintains that it is a retailer of countertops, regardless of whether or not it installs the countertops. The purchase of countertop materials and other items transferred to customers would then qualify for the resale
exemption.
During most of the audit period, the Taxpayer charged and collected sales tax on jobs involving the sale and installation of countertops. However, in many cases, the Taxpayer did not remit the sales tax collected from customers to the Department. The Taxpayer also failed to charge sales tax on fabrication labor billed in connection with the sale of countertops on an uninstalled basis. The Taxpayer states it only provides installation services with regard to these sales and there is no fabrication of tangible personal property. The Taxpayer suggests that the audit assessment erroneously includes use tax on exempt tools, supplies and countertop materials purchased for resale to other contractors.
DETERMINATION
Classification of Countertops as Real Property
To determine if an item of tangible personal property loses its identity as tangible personal property upon installation and becomes real property, the Department looks to the tests set out by the Virginia Supreme Court in Danville Holding Corp. v. Clement, 178 Va. 223 (1941) and confirmed in later cases, such as Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970). In Danville Holding, the Court set out three primary factors for determining whether property used in connection with realty is a fixture:
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- (1) annexation of the chattel to the realty, actual or constructive;
(2) adaptation to the use or purpose to which that part of the realty to which the property is connected is appropriated; and
(3) the intention of the owner of the chattel to make it a permanent addition to the freehold.
- (1) annexation of the chattel to the realty, actual or constructive;
The Court in Danville Holding stated that annexation of the property may be actual or constructive and also held that the method of annexation to the realty only receives slight consideration. The court stated that "adaptation of the chattel to the use of the property to which it is annexed is entitled to great weight, especially in connection with the element of intention. If the chattel is essential to the purposes for which the building is used or occupied, it will be considered a fixture, although its connection with the realty is such that it may be severed without injury to either." Although essentiality of purpose and annexation to the realty are important considerations, the Court further stated that "the intention of the party making the annexation is the paramount and controlling consideration."
The countertops at issue are attached to permanent cabinets by sealants and caulking, which annexes the countertops to the realty. The countertops are adapted to the use of the dwelling to which they are annexed and are essential to the purpose for which the dwelling was acquired and used. The countertops remain in place for their normal lives, subject to the necessity or desire to replace, maintain or repair them. Countertops enhance the usefulness and market value of the realty and pass with the sale of the home. For these reasons, it is reasonable to conclude that the intention of typical homeowners is to permanently annex countertops to the realty.
The Department's staff has previously researched the opinions and decisions rendered by other state tax departments and various state courts. In a majority of cases, countertops are commonly treated as permanently installed fixtures in homes. As a result, countertops are typically considered in assessing the value of homes for property tax purposes. While these opinions are not controlling for this case, they provide support for the Department's determination.
The Taxpayer cites Public Document (P.D.) 07-81 (5/18/07) to support its position. This ruling discusses a racking system installed in a warehouse building and concludes that, although the warehouse racks were anchored to the realty, the racks remained tangible personal property upon installation. I am not persuaded that this ruling is on point with the facts in this case. In this ruling, the warehouse racks are considered trade fixtures, which distinguish the racks from countertops that are typically installed in residences. Trade fixtures may or may not be used or conveyed with the building as the use or ownership of the building changes. This is not the case for a residence, which remains a residence after it is sold or ownership is transferred. A critical factor is that the intention of the owner of trade fixtures installed in a building is often different than the intention of the owner of fixtures installed in a residence.
The Department has issued several public documents that demonstrate the Department's consistent position has been that countertops become realty upon installation, and businesses that sell and install countertops are classified as real property contractors. For example, see P.D. 09-35 (3/31/09) and P.D. 96-111 (5/31/96). Based on the above, the Department's treatment of countertops in this instance as real property fixtures is correct.
Retailer vs. Contractor Classification
The Taxpayer disputes the contractor classification of its countertop business and contends that the Department's policy to treat countertop installations as fixtures of real property rather than as sales of tangible personal property is outside the scope of Va. Code § 58.1-610. As previously discussed, the Department's policy conforms to the longstanding rules set out by the Virginia Supreme Court for determining whether tangible personal property remains tangible personal property or becomes part of real property upon installation.
The Taxpayer cites P.D. 07-108 (7/6/07) to support its assertion that it should be classified as a retailer for all sales of countertops, including those it installs. This ruling discusses the application to countertop businesses of the provisions set out in Va. Code § 58.1-610 D and Title 23 of the Virginia Administrative Code (VAC) 10-210-410, subsections E and G. Title 23 VAC 10-210-410 E states that fabricators operating in a dual capacity of fabricating tangible personal property for sale or resale and for their own use or consumption in real property construction contracts must follow a primary purpose rule based on gross receipts to determine the application of the sales and use tax. The Taxpayer primarily fabricates for its own use or consumption so it must apply the tax in accordance with Title 23 VAC 10-210-410 D. Further, the sale of countertops on an uninstalled basis is a retail sale and the sales tax must be collected on the retail sales price of those countertops. The Taxpayer can only purchase under the resale exemption those countertop slabs or materials that can be identified at the time of purchase as a purchase for resale.
The provisions set out in Va. Code § 58.1-610 D and interpreted by Title 23 VAC 10-210-410 G are not applicable to the Taxpayer's business. The Department strictly interprets this section of the law, which is discussed in and supported by public documents such as P.D. 08-98 (6/18/08) and P.D. 00-83 (5/16/00). Countertops are not among the items listed in Va. Code § 58.1-610 D that, when installed by the seller, are subject to the classification rules set out in Title 23 VAC 10-210-410 G. Thus, sales and installation of countertops are not treated as retail sales transactions, regardless of whether the countertop business meets the retailer criteria set out in subsection G of the regulation.
Based on the cited authorities and the Department's longstanding policy, the Taxpayer's treatment as a real property contractor rather than a retailer with respect to the sale and installation of countertops is correct. As a real property contractor, the Taxpayer is subject to the provisions set out in Va. Code § 58.1-610 A, which provides that:
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- Any person who contracts orally, in writing, or by purchase order, 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. Any sale, distribution, or lease to or storage for such person shall be deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale, and the dealer making the sale, distribution, or lease to or storage for such person shall be obligated to collect the tax to the extent required by this chapter.
As a contractor that fabricates, sells and installs countertops, the Taxpayer also follows the rules set out in Title 23 VAC 10-210-410 E. This regulation and the statute cited above establish that the resale exemption is riot applicable to purchases of tangible personal property for use or consumption by a real property contractor. Accordingly, the Taxpayer must pay sales or use tax on the cost price of all countertop materials and supplies purchased for incorporation into real property. The sale of countertops by the Taxpayer without installation is subject to the retail sales tax.
Fabrication and Installation Labor
The Taxpayer maintains that it does not fabricate countertops but only provides installation services. Virginia Code § 58.1-603 imposes the sales tax upon the gross sales price of tangible personal property sold at retail. Pursuant to Va. Code § 58.1-602, "sale" is defined as:
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- any transfer of title or possession, or both, exchange, barter, lease, or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication." (Emphasis added.)
Fabrication is then defined in Title 23 VAC 10-210-560 A as "[a]n operation which changes the form or state of tangible personal property." Stone countertop businesses typically custom cut stone slabs to fit each individual installation. Cutouts are often made in the slabs to accommodate sinks, plumbing fixtures and similar items. Various edging treatments are also cut into the countertops. All of the operations performed by the Taxpayer to cut, drill and edge countertops are fabrication, and the labor charges are properly included in the taxable sales price of the countertops. The Taxpayer's website clearly states that it fabricates countertops, which is consistent with the activities of most countertop businesses. I am not persuaded by the Taxpayer's assertion that it does not fabricate countertops.
Further, the Taxpayer suggests that the Department's audit assessment may improperly include charges for installation labor. Installation labor charges are exempt from the sales and use tax when separately stated, in accordance with Va. Code § 58.1-609.5 2. The Taxpayer should note that installation charges included in the lump sum sales price of tangible personal property are taxable. However, fabrication is not installation for purposes of the sales and use tax. The Taxpayer has not provided sufficient information to support its claim that installation charges were improperly assessed by the Department. If the Taxpayer can provide evidence of specific transactions during the audit period in which separately stated installation charges were assessed in error, the charges will be removed from the audit.
Exemption for Tools and Supplies
The Taxpayer contests the assessment of use tax on tools and supplies on the basis that the countertops do not become realty upon installation. Absent an applicable exemption, all purchases by the Taxpayer of tools and supplies are subject to the tax. Generally, tools and supplies used to install tangible personal property are taxable at the time of purchase, whether the installed property remains tangible or becomes real property after installation. Tools and supplies are for the installer's use and, absent an applicable statutory exemption, are taxable at the time of purchase. The Taxpayer has not provided sufficient information to support its position that purchases of tools and supplies qualify for exemption.
The Taxpayer may be suggesting that purchases of the tools and supplies at issue qualify for the manufacturing exemption. To qualify for the manufacturing exemption, a business must be an industrial manufacturer. Virginia Code § 58.1-609.3 2 iii provides an exemption from sales and use tax for:
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- machinery or tools or repair parts therefore or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing ... products for sale or resale ....
P.D. 08-98 (6/18/08) explains that countertop businesses that fabricate countertops primarily for their own use or consumption in real property construction do not qualify for the manufacturing exemption. In accordance with Title 23 VAC 10-210410 F, the fabricator must primarily fabricate countertops for sale or resale to qualify for the exemption. This determination is made based on the fabricator's gross receipts. For this audit period, more than 50% of the Taxpayer's gross receipts were derived from transactions for the sale and installation of countertops. Because the Taxpayer was primarily fabricating countertops for its use or consumption, the manufacturing exemption does not apply to its fabrication activities.
Further, P.D. 09-35 (3/31/09) discusses the fact that a manufacturing activity must be industrial in nature to qualify for the exemption. Based on the definition of manufacturing in Va. Code § 58.1-602, the Department looks to the business classifications set out in the Standard Industrial Classification (SIC) Manual and now the North American Industry Classification System (NAICS) when determining if a business activity, is industrial in nature. Countertop businesses that primarily install the countertops they fabricate fall under a non manufacturing business classification and are not deemed to be manufacturers in the industrial sense. Thus, the Taxpayer's use of machinery, tools and supplies to fabricate countertops is a taxable activity.
Unsupported Transactions Included in Audit
The Taxpayer states in its letter that every exception in the audit is contested. The Taxpayer contests the assessment of use tax on various charges in the audit and requests the Department to provide specific details to support the inclusion of the taxed transactions in the audit. Virginia Code § 58.1-205 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." Virginia Code § 58.1-633 provides that:
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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 account 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.
The auditor listed the exceptions in the audit based on a review of the records made available by the Taxpayer. The records for the transactions listed as taxable in the audit did not contain sufficient information to determine if the Taxpayer paid sales or use tax on the transactions or if the transactions were subject to the tax. In such cases, the Taxpayer must provide additional documentation to support removing the exceptions from the audit. The Taxpayer has provided some documentation to supplement this appeal and audit exceptions will be removed or adjusted based on the Department's review of this documentation. I will agree to allow the Taxpayer 60 days from the date of this letter to provide additional documentation for review and possible adjustment by the Department. Any exceptions that remain after this review will be considered taxable.
Sales Tax Collected and Not Remitted
While the Taxpayer indicates that it disputes all exceptions in the audit, it has not presented any arguments that address the sales tax collected and not remitted portion of the assessment. The auditor assessed this portion of the audit based on monthly sales tax collection data obtained from the Taxpayer. Further, penalty was assessed based on Title 23 VAC 10-210-2032 A 1 b, which states that penalty cannot be waived when a taxpayer has collected sales tax but failed to remit the amounts collected to the Department. Thus, the assessment is correct with respect to sales tax collected and not remitted to the Department.
CONCLUSION
The countertops sold and installed by the Taxpayer become real property upon installation. The Taxpayer was correctly classified as a using and consuming real property contractor in the Department's audit. The Taxpayer will be allowed 60 days to provide additional documentation indicating that the correct amount of sales and use tax was paid on purchases included in the audit or that nontaxable transactions are included in the list of audit exceptions. The Department will review any information provided in addition to the information already received from the Taxpayer. The audit and assessment will be adjusted based on this review. If no further information is received, the audit will be revised based on the information already provided. The assessment will be considered correct with respect: to those exceptions and issues that remain after the Department's review of the documentation is completed. An updated bill will then be sent to the Taxpayer and should be paid within 30 days to avoid the accrual of additional 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 *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1406472640.S
Rulings of the Tax Commissioner