August 3, 2016
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek a ruling on the application of the Virginia retail sales and use tax to ***** (the “Taxpayer”). I apologize for the delay in responding to your request.
FACTS
The Taxpayer uses debt capital that is provided by investors to finance energy efficient upgrades, i.e., LED lights, and high efficiency HVAC systems, etc., for commercial buildings. The Taxpayer enters into capital leases with building owners (the “Customer”) for the energy efficient upgrades. The Taxpayer then pays a contractor (the “Contractor”) to obtain and install the energy efficient equipment. The Taxpayer issues an ST-10 to the contractor for the equipment installed and pays the contractor for the equipment and labor. The Taxpayer enters into a capital lease with the Customer, who makes lease payments to the Taxpayer in monthly installments. The Taxpayer itemizes the equipment, labor, and interest fees in the capital lease. The Customer may purchase the energy efficient equipment at the end of the capital lease for one dollar ($1.00).
As provided above, the Taxpayer itemizes the terms of the capital lease to the Customer to separately state equipment, labor and interest fees. The itemization schedule within the capital lease also itemizes the Virginia sales tax on the equipment portion of the lease on both a total lease amount and monthly payment schedule. The Taxpayer seeks clarification as to the application of the sales tax to both the separately stated labor cost and interest fees. The Taxpayer also requests confirmation that its method for collecting and remitting the sales tax is acceptable.
RULING
In order to determine the sales tax application to your business proposal, it must first be determined if the work being performed by the Contractor qualifies as a sale/lease of tangible personal property or as an improvement with respect to real property. This determination is based on whether tangible personal property installed by the contractor remains tangible personal property or whether the tangible personal property becomes a part of real estate.
To determine whether an item of tangible personal property loses its identity as tangible personal property upon installation and becomes real property, we must look at the test set out by the Virginia Supreme Court in Transcontinental Pipeline Corporation v. Prince William County, 210 Va. 555, 172 S.E.2d 761 (1969). In that case, the court ruled that the classification of property as real estate or as tangible personal property must be determined by the law of fixtures using three general tests to determine whether an item of personal property placed upon realty becomes itself realty. 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 (the chief test).
Virginia Code § 58.1-610 addresses contractors, with subsection A providing the following:
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 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.
In interpreting this statute, Title 23 of the Virginia Administrative Code (VAC) 10210-410 addresses contractors with respect to real estate and subsection A of this provides, in part, the following:
A contractor is defined as any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon, including highways, and in connection therewith to furnish tangible personal property, whether such person is a prime contractor or subcontractor. Unless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.
Tangible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (the contractor), and not for resale by the contractor. The dealer (supplier) making the sale, distribution, or lease to or storage for such a contractor must collect the tax from him. No sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency, a public service corporation, a nonprofit school, or nonprofit hospital, or on the ground that the contract is a cost-plus contract. (Emphasis added).
Based on the information you have provided and the sample contract enclosed with your letter, the transaction for which you seek clarification would qualify as an equipment lease. The contract between the Taxpayer and the Customer is a financial lease with an option to buy at the completion of the contract terms. Provided the equipment in such contracts remains tangible personal property prior to and after installation, the Taxpayer's proposed itemized contract and itemized payment schedule, which separately states tangible property, labor, interest and tax, would be appropriate, as the contract is not a contract for the improvement of real property, but for the sale and installation of tangible personal property.
It should be noted that should the Taxpayer enter into a capital improvement contract with a Customer that qualifies as a real property contract, i.e., the property installed meets the law of fixtures based on the criteria established in Transcontinental Pipeline Corporation v. Prince William County, 210 Va. 555, 172 S.E.2d 761 (1969) set forth above, the itemized contract and itemized payment schedule would not be appropriate. As provided in Va. Code § 58.1-610 and VAC 10-210-410 set forth above, a real property contractor is the user and consumer of all property used by it in performing real property contracts and would be required to either pay the sales tax to the supplier at the time of purchase, or accrue and remit the use tax directly to the Department. The Taxpayer should not issue an ST-10 resale exemption certificate to a real property contractor. All sales taxes paid by the real property contractor should be taken into account when structuring the financial contract between the Taxpayer and its customers.
I hope the above information responds to your inquiry. This response is based on the information provided and the facts as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.
The Code of Virginia and regulation sections cited in this letter are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any additional questions about this ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6146468838.Q