Document Number
11-35
Tax Type
Retail Sales and Use Tax
Description
Machinery used in its fabrication of custom countertops taxed.
Topic
Classification
Manufacturing Exemption
Date Issued
03-04-2011

March 4, 2011




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

Dear *****:

This reply is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period January 2003 through June 2009. I apologize for the delay in the Department's response.

FACTS


The Taxpayer fabricates and installs granite, metal and concrete countertops. The Taxpayer cuts, forms and shapes the raw materials into custom countertops that it installs in real property. The auditor concluded that the Taxpayer is a fabricator and a real estate construction contractor. As such, the auditor assessed the use tax on the Taxpayer's purchases of machinery used in its fabrication of custom countertops.

The Taxpayer protests the auditor's conclusion that it is a fabricating contractor and cites as support for its argument the Standard Industrial Classification (SIC) group 32. The Taxpayer also cites the definition of manufacturing in Va. Code § 58.1-602, which provides that businesses classified in SIC code group 32 qualify as "industrial in nature".

DETERMINATION


Virginia Code § 58.1-602 establishes that "industrial in nature" shall include but not be limited to, those businesses classified in codes...20 through 39 published in the Standard Industrial Classification Manual..." The SIC has subsequently been replaced by the North American Industry Classification System (NAICS). The industrial classifications set out by the SIC and NAICS classify businesses according to their primary activity.

All sales made by the Taxpayer for the audit period were for the fabrication and installation of countertops. Therefore, as concluded in Public Document (P.D.) 09-35 (3/31/09), unless the Taxpayer's primary business activity is industrial manufacturing, it may not claim the manufacturing exemption. Consistent with P.D. 09-35, the Taxpayer's NAICS classification is most similar to those businesses classified as contractor businesses under NAICS #238340, #238350 or #238390, none of which are manufacturing codes.

The above determination is also consistent with the Department's long standing policy of treating the sale and installation of countertops as real property construction services. See public documents 08-98 (6/18/08), 07-108 (7/6/07), 00-83 (5/16/00) and 96-111 (5/31/96). As a real property contractor, the Taxpayer is guided by the provisions found in Va. Code § 58.1-610 A which instruct::
    • 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 ....

Based on the foregoing authorities, the manufacturing exemption does not apply in this instance and the tax assessed in the audit is upheld.

The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days from the bill date to avoid additional interest charges. The Taxpayer should remit its payment to Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning the payment of the assessment, you may call ***** at *****.

Law Change

The 2010 Session of the Virginia General Assembly enacted legislation that amends Va. Code § 58.1-610 D and treats dealers who sell and install countertops as retailers for purposes of the retail sales and use tax (See P.D. 10-100 (6/11/10)). As such, affected dealers who sell countertops must treat such transactions as retail sales and collect the tax from their customers. Virginia law generally treats businesses as contractors if they sell and install tangible personal property that becomes real property after installation. The law makes an exception for such business and allows them to be treated as retailers if they (i) sell and install certain specified items such as countertops, and (ii) maintain a retail or wholesale place of business and an inventory of the countertops for resale, and (iii) perform installation as part of or incidental to the sale of the countertops. As retailers, they are authorized to collect the retail sales and use tax from their customers on the sale of these countertops. Separately stated installation charges are exempt from the tax. If a person does not meet all three requirements of a retailer, as set forth above, he will be deemed a contractor and must pay the sales tax on the countertops at the time of purchase or accrue use tax, even if he is making sales of such items. This change in the law became effective for all taxable transactions occurring on or after July 1, 2010 or contracts initially entered into on or after that date.

Because the Taxpayer's audit assessment covers periods prior to the effective date of the law change, the assessment of the tax is proper. For periods beginning July 1, 2010 and forward, the Taxpayer should treat itself in accordance with the cited law change. If the Taxpayer qualifies as a retailer based on the tests previously mentioned, it will also qualify for the manufacturing exemption set forth in Va. Code § 58.1-609.3. The exemption is available for machinery, tools, or repair parts, fuel, power, energy or supplies used directly in manufacturing.

The Code of Virginia sections and the public documents cited are available on­line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this letter, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



                • Craig M. Burns
                  Tax Commissioner



AR/1-4069103327.M


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46