April 22, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period October 2009 through July 2012. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a bowling alley. The Taxpayer was assessed the use tax on the purchase of bowling alley equipment, primarily bowling lanes, pinsetters, ball returns and a computerized scoring system. The Taxpayer maintains that it is not subject to the retail sales and use tax on its purchase of the equipment at issue. The Taxpayer contends that the equipment at issue loses its identity as tangible personal property and becomes real property.
The Taxpayer leases the space where the bowling alley is housed from a third party. The Taxpayer contracted with a separate business (the "Contractor") for the purchase and installation of the equipment at issue. The Taxpayer states that the bowling lanes were built before the build out of the leased space. The Taxpayer states that before the store front and interior walls were built, the pinsetters were brought in and put in place towards the rear of the space using forklifts. The pinsetters are approximately 6' wide by 8' deep and weigh over 1000 pounds. The Taxpayer further provides that the pinsetters are leveled and then bolted into the concrete floors with multiple massive bolts.
Once the pinsetters were in place, the Taxpayer states that the floor crib platform system (supports the bowling lanes) was built by hand. This system is stick-built in place, leveled and bolted to the floor throughout the space. The lanes were then installed on top of the platform. The Taxpayer states that the remaining bowling equipment, such as ball returns and scoring system for the front section of the lanes, was installed into the platform. The concourse platforms, stairs and railings, walls and storefront windows and doors were the final parts of the construction build out.
The Taxpayer provides that the terms of its lease do not permit the Taxpayer to remove the equipment at issue should the lease be terminated. However, the Taxpayer provides that if removal was permitted, the walls, floor framing and concrete would have to be demolished in order to gain access to the equipment.
DETERMINATION
Real Property Versus Tangible Personal Property
Relying on Danville Holding Corp. v. Clement, 178 Va. c 223.232, 16 S.E. 2d 345, 349 (1941) and Transcontinental Gas Pipe Line Corp. v. Prince William County, 210 Va. 550 (1970), the Taxpayer maintains that the equipment at issue is permanently affixed to the real property.
Danville Holding and Transcontinental Gas Pipe Line provide a three part test to determine if tangible personal property loses its identity and becomes real property upon installation. The test is applied when there is no specific agreement between the parties as to the character of the chattel placed upon the freehold.[1] The three general tests are as follows: (1) annexation of the chattel to the realty, actual or constructive; (2) its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) the intention of the owner of the chattel to make it a permanent addition to the freehold.[2] The intention of the party making the annexation is the chief test to be considered in determining whether the chattel has been converted into a fixture.[3]
In order to determine whether the Taxpayer is liable for the tax assessed on the equipment at issue, an analysis of the aforementioned three part test must be done.
Annexation of the Property
With respect to the first test, the court in Danville Holding found that
"while...there must be actual or constructive annexation, the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which is applied and other attending circumstances as indicating the intention of the party making the annexation.[4] In this instance, the pinsetters are bolted to the concrete floor of the space. Likewise, the floor crib platform is bolted to the floor throughout the space. The remaining equipment is installed into the platform. Based upon the manner in which the equipment is installed into the space, I find that the equipment is annexed to the real property.
Adaptation to the Realty
With respect to the second test, the court found that "if the chattel is essential to the purposes for which the building is used or occupied, it will be considered a fixture..."[5] The lease agreement provides that the space is being leased for the purpose of operating a bowling alley. The bowling equipment is installed in the space, for the purpose of operating a bowling alley by the Taxpayer. Based upon these factors, I find that the equipment at issue is adapted to the space for the purpose of operating a bowling alley.
Intention of the Party
The court further held that "the intention of the party making the annexation is the paramount and controlling consideration."[6] The lease agreement states that the Taxpayer is to use the space "solely as a bowling and entertainment facility and sports bar and restaurant." The lease agreement further provides that all installed property is to be surrendered to the landlord at the termination of the lease. The Taxpayer asserts that if removal of the pinsetters and lanes were permitted, it would require the demolition of the walls, floor framing and concrete. Based upon these factors, I find that the intention of the parties is for the space to be operated as a bowling alley. Therefore, the purchase of the bowling alley equipment by the Taxpayer was intended to facilitate such operation.
Real Property Contract
The Taxpayer maintains that the contractor is liable for the tax on the bowling equipment at issue.
Virginia Code § 58.1-610 states that:
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.
Based on the specific facts in this case, it is my determination that the equipment lost its identity as tangible personal property and became real property once installed in the space. Accordingly, the contractor is deemed to be the taxable user or consumer of the equipment.
CONCLUSION
Based upon the facts presented and the above analysis, I find that the bowling equipment at issue became part of the real property when it was installed. Accordingly, the Taxpayer is not liable for the tax assessed on the purchase of the bowling equipment at issue. The audit will be returned to the appropriate field audit staff to remove the equipment from the Assets Exceptions list that became a part of the realty, consistent with this determination.
The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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 *****.
Sincerely,
Craig M .Burns
Tax Commissioner
AR/1-5627410056.P