August 18, 2020
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you request a ruling on the application of the retail sales and use tax to the sale and installation of custom closets. I apologize for the delay in responding to your request.
FACTS
The Taxpayer sells custom closet solutions to its customers. The customer designs a closet solution at the Taxpayer’s retail locations with the help of the Taxpayer’s employee. The closet solution is customized based upon the customer’s specifications and includes all materials necessary to complete installation of the closet. Essential materials include top track, standards, brackets, wall anchors and screws. The materials at issue are purchased by the Taxpayer from its vendor for resale to its customers. The Taxpayer states it does not purchase pre-designed or pre-assembled closet solutions from the vendor, and all of the materials purchased from the vendor are pre-packaged and tagged by the Taxpayer for individual sales.
Upon completion of the design phase, the customer has three options for installing the custom closet purchased from the Taxpayer: self-installation, installation by the customer’s contractor, or installation by the Taxpayer. If installation by the Taxpayer is selected, the Taxpayer’s employee helps the customer to select an installation date using the Taxpayer’s website. Upon completion of scheduling, the customer is provided a quote for installation based on 25 percent of the sales price of the custom closet. The customer is also given the option of having the Taxpayer deliver the materials to be installed for an additional delivery fee. The customer may also independently use the Taxpayer’s website to schedule installation. The Taxpayer maintains that the installation process is the same, regardless of whether the installation is performed by the Taxpayer or by the customer. The Taxpayer provides that the top rack is the only component of the closet system that is attached to the wall. The top rack is attached with screws and can be removed without causing significant damage to the real property.
The Taxpayer requests a ruling regarding whether the sale of the custom closet is considered the sale of real property or the sale of tangible personal property. The Taxpayer contends the custom closets do not become real property after installation and continue to be tangible personal property. The Taxpayer further maintains that it is not a contractor, but a retail seller of tangible personal property. The Taxpayer also requests guidance regarding the application of the sales tax to installation and delivery charges.
RULING
Tangible Personal Property v. Real Property
Virginia Code § 58.1-603 provides, in pertinent part, that the sales tax is imposed “upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth.”
In determining whether tangible personal property remains tangible or becomes real property upon installation, the Department relies on the Virginia Supreme Court’s ruling in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), which states that:
Three general tests are applied in order 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 intentions of the parties. The intention of the party making the annexation is the chief test to be considered….
In accordance with the Virginia Supreme Court’s decision, the Department places great emphasis on the intention of the parties making the annexation in determining whether the annexed property remains tangible personal property or becomes real property upon installation.
The Department applies the Transcontinental Gas Pipe Line test to the facts presented. In this case, the facts indicate that while the tracks are attached to the real property during installation, and the materials are adapted for the purpose of providing a custom closet, it is not the intention of the parties that the custom closet solution become a permanent part of real property. The tracks are the only components of the custom closets that are attached to the real property. The tracks are attached by screws that can be easily removed, and removal of the tracks does not cause significant damage to the real property. Additionally, the custom closets can be removed or modified to meet the customer’s future needs. Accordingly, based on the facts provided, I find that the custom closets remain tangible personal property upon installation, and do not become real property. As such, the Taxpayer must charge and collect the Virginia sales tax from its customers at the time sales of the materials are made, and properly report and remit the same to the Department.
Installation and Delivery Charges
Virginia Code § 58.1-609.5 2 provides that the retail sales and use tax does not apply to “An amount separately charged for labor or services rendered in installing, applying, remodeling, or repairing property sold or rented.”
Virginia Code § 58.1-609.5 3 provides that the retail sales and use tax does not apply to “Transportation charges separately stated.”
With respect to fees charged by the Taxpayer to its customer for installation of the custom closets, the sales tax is not applicable to such charges as stated in Virginia Code § 58.1-609.5 2, provided such charges are separately stated on the invoice to the customer. Likewise, in instances in which the Taxpayer delivers the materials to its customers, the delivery fee is not subject to the sales tax when the charge is separately stated on the invoice.
I hope the foregoing responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1153.P