Rulings of the Tax Commissioner

August 25, 2020

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

Dear *****:

This is in response to your letter, submitted on behalf of ***** (“Taxpayer 1”) and ***** (“Taxpayer 2”) (together, the “Taxpayers”), in which you appeal the retail sales and use tax assessments issued to the Taxpayers as a result of an audit for the periods July 2011 through June 2014. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers are out-of-state real property contractors. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property. The Taxpayers take exception to the tax assessed on those purchases and claims they should be removed from the audit for various reasons as set out below.

DETERMINATION

Records

Before addressing the issues of the audits, the importance of record keeping should be emphasized.

Virginia Code § 58.1-205.1 provides that “[a]ny assessment of a tax by the Department shall be deemed prima facie correct.”  This means that the burden of proof is upon the Taxpayers to establish that the assessments are incorrect.

Virginia Code § 58.1-633 is the records statute. Subsection A of such statute provides the following:

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 records statute is interpreted by Title 23 of the Virginia Administrative Code (VAC) 10-210-470, which specifically indicates the type of records that must be maintained for sales and use tax purposes.

Fencing, Cabinets and Countertops – Subject to Special Treatment

Virginia Code § 58.1-610 A provides 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.

The regulation that interprets this provision, Title 23 VAC 10-210-410 A, further provides: 

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.

An exception to this general rule was in effect during the audit periods. The exception was formerly provided in Virginia Code § 58.1-610 D, which deemed certain businesses that sold and installed fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items as retailers.

Subsection G of Title 23 VAC 10-210-410 addressed the exception and provides that a person was deemed a contractor if it did not satisfy the three-prong retailer test [i.e., a person was deemed a retailer if he or she maintained a retail or wholesale place of business, carried an inventory of fencing, cabinets, and countertops (or most of the materials for such items), and performed installation of such items].

Specifically with respect to fencing, cabinets, and countertops, when such person charged for the work but did not charge a sales tax, it was generally unclear whether such person was a consuming contractor or a retailer when there was no further evidence to establish such person as a contractor or a retailer. Based on the retailer definition set out in Title 23 VAC 10-210-410 G, such person was either a contractor or retailer of fencing, cabinets or countertops depending upon whether or not such person satisfied the three-prong retailer test. In those types of transactions, additional vendor information was needed beyond the invoice to determine the correct tax treatment for the Taxpayers. The Taxpayers as purchasers would have needed to receive and retain a written and signed statement from the vendor or subcontractor as to whether it was engaged as a retailer (1) or contractor of fencing, cabinets, and countertops for its Virginia jobs.

The issues and determinations set out below are with respect to Taxpayer 1’s audit unless otherwise noted as applicable to Taxpayer 2’s audit.

***** (Vendor 1)

The Taxpayer presents a vendor letter indicating that the vendor fabricated and installed fences at the job site. It also furnished its main costs for the particular project in question. These costs indicate that the vendor paid its state’s sales or use tax on the materials used in the project. Although no information was furnished as to whether the vendor satisfies the three-prong retailer test set out in Title 23 VAC 10-210-410 G, it is evident from the information presented that the Taxpayer treated itself as a consuming contractor of fencing. As such, line items 150, 154, 158 and 163 will be removed from the audit.

***** (Vendor 2)

This issue concerns line items 69, 78 and 79 of the audit’s exceptions list. The Taxpayer presents an email from this vendor claiming that “everything we do becomes part of the real property” and “we have never sent a piece of personal property to the state of Virginia.”  The descriptions of the three vendor transactions held in the audit indicate that the work consisted of:  countertops, casework, desk and a vanity in one transaction, shop drawings associated with the sale of casework in another transaction, and a lump sum sale and install of a desk, table, etc. in the final transaction. 

The information presented for Vendor 2, however, provides no indication as to how the desk and tables were permanently affixed to real property. In the absence of clarifying evidence, such as the statement of work for the contract or other contract evidence indicating a permanent attachment of the desks and table to real property, the desks and tables will be treated as remaining tangible personal property upon installation as they are commonly treated. The same treatment applies to the casework, as it can be either a tangible or real property installation. As for the countertops and vanities billed in invoices 052013 (line item 79) and 4192013 (line item 78), their cost is bundled with the casework, a reception desk, a communal table, screens and tables, which may or may not be affixed to real property. Absent sufficient information as to how these items were installed, permanently or merely set in place, I find no basis at this time to remove line items 69, 78 and 79 from the audit. In the event that the tables, screens, desk and casework were not permanently installed, then evidence would need to be submitted as to their individual costs and the audit can be revised to remove the countertops and vanities, except for the countertops used to construct tables and a desk.

***** (Vendor 3)

This out-of-state vendor sold and installed cabinets and countertops that were subject to the exception addressed in subsection G of Title 23 VAC 10-210-410. The vendor’s charges were treated as untaxed retail sales because no information was provided as to whether or not the vendor satisfied the retailer test. The Taxpayers contend that such charges are nontaxable because the vendor is engaged as a consuming contractor of the cabinets and countertops that it furnished and installed. 

As support for its contention, the Taxpayers have furnished information that this vendor is registered with the Department to remit the consumer use tax. We have verified this registration and also confirmed that this vendor is not registered to collect Virginia retail sales tax. Because this vendor is not engaged as a retailer but as a contractor under Title 23 VAC 10-210-410 G, and the additional documentation supports treating Vendor 3 as a consuming contractor of all of the transactions held in the audit, I find sufficient basis for the removal of the vendor transactions from the Taxpayers’ audits.

***** (Vendor 4)

This issue concerns line item 87, which is described as “diff. in mtls & svcs. invoiced & A1A forms.”  The Taxpayer presents a letter from Vendor 4 who claims to be a contractor that manufactures, delivers and installs kitchen and bath cabinetry. This vendor also indicates that it is registered to pay Virginia use tax. Copies of the vendor’s invoices are also provided and indicate that the Taxpayer was charged sales tax on the invoices. However, the invoices also indicate that the sales tax charged was not the full amount of tax owed. That is, no sales tax was charged on the “service” charges. The term “sales price” is defined by Virginia Code § 58.1-602 and includes “any services that are a part of the sale.”  [Emphasis added.]  Every invoice presented shows separate charges for kitchen and bath cabinets, service, installation, delivery and the sales tax. On every invoice, sales tax at 5% was charged on the sales prices for the kitchen and bath cabinets. No tax was charged on the separate charges for service, installation and delivery. 

Separately stated installation services are exempt from the retail sales and use tax under Virginia Code § 58.1-609.5.2, and separately stated transportation charges are exempt from the retail sales and use tax under Virginia Code § 58.1-609.5.3. However, there is no statutory exemption for the unspecified “services” charged on these invoices. Accordingly, line item 87 should represent the difference between the total taxable measure and the measure that was taxed. In addition, line item 87 should include an adjustment for the taxable amount owed in connection with Vendor 4’s invoice 53327 which incorrectly charged tax at the former 5% tax rate rather than the 5.3% tax rate in effect at the time of billing. Line item 87 will remain in the audit but will be reduced from 57,117.94 to 29,619.31.

Other Purchase Transactions

***** (Vendor A)

The descriptions in the audit report indicate that the contested purchases from this vendor are for doors and hardware. None of the information presented indicates that these doors consisted of storm doors subject to the exception addressed in subsection G of Title 23 VAC 10-210-410. Rather, the furnishing and installation of doors for residences and other structures is subject to the contractor provisions of subsection A of Virginia Code § 58.1-610. Thus, if the transactions require Vendor A to furnish and install doors and related hardware, it should be treated as consuming contractor and the contested transactions removed from the audit. On the other hand, if Vendor A furnished the doors without installation, then the transactions should be treated as sales of tangible personal property. If the latter, the auditor indicates that sales tax was reported by Vendor A for the doors and hardware at issue but was credited such that no sales or use tax was reported for such items. Thus, no sales tax was reported. The Taxpayer has not furnished any invoices or contract documents (such as the statement of work, etc.) for the items held in the audit. Absent clear evidence as to how to treat these transactions, line items 62, 66, 70, 74, 80, 90, 112 and 164 will remain in the audit. In addition, line item 1 will remain in Taxpayer 2’s audit.

***** (Vendor B)

Based on the records presented at the time of audit, transactions for the purchase of metal stairs and railings from this vendor were included in the audit. The Taxpayer claims, however, that this vendor is a consuming contractor of stairs and rails because it furnished and installed such items. The subcontract agreement indicates that it is a standard form construction subcontract for metal stairs and rails. The Taxpayer presents copies of the invoices related to the contested charges. In each instance, the invoice includes a statement that the contested items were delivered and installed. When a vendor permanently affixes items to the real property, it is deemed a consuming contractor. In this instance, I find that the contested transactions with the Taxpayer constitute nontaxable real property installations. As such, line items 140, 148, 155, 166 and 167 will be removed from the audit.

***** (Vendor C)

Line item 114 of the contested purchases exceptions list is described as an equipment rental with no invoice provided. The Taxpayer claims that such charge is in dispute, i.e., it never paid the invoiced amount and does not intend to pay it. The Taxpayer also claims that the description of the transaction is incorrect, i.e., the transaction was not for an equipment rental. Rather, the charge was for an accumulation of overage charges that the Taxpayer disputes with its vendor. When no consideration is paid in connection with a transaction, it does not constitute a completed sale of tangible personal property. Accordingly, provided the Department’s auditor is able to verify that such charges were never paid, line item 114 will be removed from the audit.

***** (Vendor D)

Two charges are included in the audit for a shaft wall system. The Taxpayer contends that this vendor is a contractor that paid sales tax on the cost of materials to its vendor, Commonwealth Building Materials (the “sub-vendor”). The Taxpayer did not provide any invoices issued by Vendor D. The Department’s auditor obtained a copy of the Taxpayer’s purchase order agreement with Vendor D. According to such agreement, Vendor D was to furnish materials for a complete shaft wall system to the Taxpayer. There is no mention that Vendor D was expected to install such materials. The sub-vendor’s invoices indicate a different shipping destination than the shipping destination listed in the Taxpayer’s purchase order agreement. As such, we cannot be assured that the materials ordered under the purchase order agreement are the same materials furnished by the sub-vendor. Furthermore, none of the sub-vendor’s invoices make any reference to the Taxpayer’s purchase order number, which was a requirement of the purchase order. 
Based on these facts, I find insufficient basis for concluding that Vendor D acted as a consuming contractor or that the sub-vendor’s invoices relate directly to the purchase order in question. Accordingly, line items 85 and 115 will remain in the audit.

***** (Vendor E)

This issue concerns invoices 484 and 477. The vendor sold customized male and female clothing (shirts and jackets) to the Taxpayer. All clothing was shipped to the Taxpayer’s office outside Virginia and first used by its staff at such location. The Taxpayer claims that the contested purchases have no connection with Virginia.

For the vendor’s invoice 484, one-third of the cost of this clothing was allocated to Virginia projects based on the Taxpayer’s internal job costing methodology. Such allocated amount was assessed in the audit. As for the remaining two-thirds of the allocated costs, I note that almost one-third of the charge represents the cost of clothing for female employees, who do not visit project sites. As such, it appears that the remaining one-third of the allocated cost would represent male clothing not used in Virginia.

No evidence has been presented that the Taxpayer paid sales tax to its home state for the clothing at issue. In the absence of evidence that such clothing was properly taxed in another state, and the fact that one-third of the cost of clothing was allocated to Virginia for business use, then it appears that Virginia has the right to tax the untaxed clothing cost allocated to Virginia. Accordingly, line items 9 and 26 will remain in the audit.

***** (Vendor F)

This issue concerns invoice 809-IN, i.e., line item 100 of the contested purchases exception list. The transaction occurred in July 2013 and is described in the audit as “storefront door with tempered glass.”  The Department’s auditor obtained a copy of Vendor F’s invoice, and it makes no mention of any installation charge. As such, the auditor treated the transaction as the sale of tangible personal property without installation. 

Based on an email from the vendor, the Taxpayer claims that the materials were consumed at the construction site in Virginia but initially delivered to the vendor’s location outside Virginia before being shipped to Virginia. Consequently, the vendor paid its state’s use tax on the cost of materials. Despite this, the email documentation provides no transactional evidence, such as an installation/construction subcontract, to verify that the vendor was hired to furnish and install the storefront door. Absent evidence to establish that the vendor was engaged as a real property installation contractor regarding the transaction in question, it appears that the transaction was a sale in interstate commerce in which the vendor’s state would have no right of taxation. Accordingly, we cannot accept the vendor’s claim that it properly owed and paid use tax to its state rather than pay use tax to Virginia.

***** (Vendor G)

This is a clothing allocation issue that is similar to the one addressed with Vendor E, except in this instance Vendor G charged sales tax to the Taxpayer. Vendor G is located in the Taxpayer’s home state and collected such state’s sales tax from the Taxpayer. Such sales tax charged and collected is imposed at a higher rate than the Virginia retail sales and use tax. Despite the allocation of clothing costs to Virginia, no sales or use tax is owed to Virginia on these allocated costs. Line items 35, 42, 43, 49, 58, 76 and 92 will be removed from the audit.

***** (Vendor H)

This is another allocation issue in which 10% of the cost of wine cases of one invoice was allocated to Virginia projects for business purposes although not ultimately delivered or consumed in Virginia. Another vendor invoice indicates that 315 foldable tablet easels were sold to the Taxpayer and the entire cost appears to have been allocated to Virginia projects although not delivered or consumed in Virginia. In both instances, the vendor shipped these items to the Taxpayer in its home state and charged its state sales tax. Because the Taxpayer’s state sales tax rate is greater than Virginia’s retail sales tax rate, no Virginia retail sales or use tax is owed. Line items 59 and 93 will be removed from the audit.

***** (Vendor I)

The Taxpayer provides the vendor’s invoices and establishes that the correct tax amount was charged on invoice 212166. Accordingly, line item 149 of the contested purchases exception list will be removed from the audit.

***** (Vendor J)

This issue also involves tangible personal property for which its cost is allocated to a Virginia job. The Taxpayer maintains that the contested purchases were not used or consumed in Virginia. Furthermore, the Taxpayer submits invoice copies that indicate that the Taxpayer’s state sales tax was charged. While we have not confirmed or denied the place of use of these items, the evidence presented is sufficient to remove line items 20 (invoice 4744), 21 (invoice 4762), 45 (invoice 5228), 46 (invoice 5264), and 67 (invoice 5509) from the audit because the sales tax was properly paid to the Taxpayer’s home state where first use is made and the home state sales tax rate (and amount) exceeds what would be due to Virginia if the property had also been used in Virginia.

***** (Vendor K)

Based on the evidence presented, the Taxpayer contends that Vendor K operated as a consuming contractor by furnishing and installing rolling grilles for a Virginia real property project. Although the Taxpayer entered into a purchase order agreement with Vendor K, the vendor’s invoice indicates a breakdown for material and labor costs but does not describe whether such labor costs are for fabrication or installation or a combination of both. In any event, the Department’s auditor obtained a copy of the Taxpayer’s purchase order agreement with Vendor K. Attachment B of such agreement specifically requires a local inspection and states that the “subcontractor shall supply and install the security grill type door in the amenities area.”  Based on these documents, Vendor K appears to be identified as the real property installation subcontractor in this instance. Accordingly, line item 95 (invoice 29268) will be removed from the audit.

***** (Vendor L)

The Taxpayer presents a letter from Vendor L and two invoices for the vendor’s purchase of materials and/or work. For one invoice, the materials purchased were wooden (birch) products, hardware, brackets, covers, bases and caps. As for the other invoice, antique mirrors were purchased. The subcontract agreement is a standard form construction subcontract that appears to require Vendor L to install the materials. Despite this, it is not readily clear as to whether or not these materials were permanently installed by Vendor L. Mirrors generally remain tangible personal property when installed unless permanently bonded to the surface. In this case, no information is provided as to how Vendor L installed the mirrors. If the wooden products and mirrors were permanently affixed to the real property, then Vendor L could be treated as a contractor. Despite this, if the casework and mirrors are not permanently affixed to real property, then the resale exemption would apply. Because the materials are installed in a federal Department of Housing and Urban Development project, an item determined to be purchased for resale to the Taxpayer that would resale it to the federal government would be exempt. Accordingly, regardless of whether the items in contention are permanently installed or not, I find basis to remove line item 156 from the audit.

***** (Vendor M)

These invoices are for framing and sheathing materials for a Virginia project and plans. Both invoices are annotated with the Taxpayer’s approval. However, the Taxpayer indicates that no sheathing or framing materials were furnished by the vendor. Absent a corrected invoice showing that framing or sheathing materials were removed from the billings, I find no basis for excluding such material amounts from the audit. Because the plans were not used at a Virginia jobsite but used at the Taxpayer’s location outside of Virginia, the charges for the set of plans will be removed from the audit. Line item 88 (invoice 1304) will be reduced from 466.00 to 425.00, and line item 96 (invoice 1306) will be reduced from 196.00 to 155.00.

Unknown Transactions

According to the Taxpayer, line items 52 and 61 were journal entries and represent the cost allocation of materials transferred from another project to a Virginia project. As such, these journal entries constitute materials used or consumed in Virginia. These journal entries are logged into the general ledger to record business transactions, such as purchases of lumber and materials. Accordingly, these journal entries should be tied to particular invoices, and such invoices will either be taxed or untaxed. No evidence has been submitted that the journal entries in question were previously taxed. Absent proof of tax payment, line items 52 and 61 will remain in the audit.

Business Costs Allocations

In this audit, the auditor found several business costs allocated to Virginia projects. In several instances, the Taxpayer claimed that items for which the cost is allocated to Virginia projects were not used or consumed in Virginia. When the Taxpayer allocates such costs to Virginia, it is important that it maintain sufficient records to indicate when those costs were not actually used or consumed in Virginia. Otherwise, an allocated cost to a Virginia project will be assumed to be taxable in Virginia, and the Taxpayer will have the burden of proving that such costs are not subject to the Virginia retail sales and use tax.

Legislative Change

The 2017 Virginia General Assembly passed legislation that repealed the retailer exception in Virginia Code § 58.1-610 D. The legislation, Senate Bill 1308 (2017 Acts of Assembly, Chapter 449) and House Bill 1890 (2017 Acts of Assembly, Chapter 436) became effective July 1, 2017. The legislation amended Virginia Code § 58.1-610 D by eliminating the retail classification of businesses that sell and install fences, venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units or other like or comparable items. As a result of the law change, businesses that sell and install the items listed above should treat themselves as real property contractors and are be deemed the users and consumers of items purchased for installation in real property construction work. The Taxpayers as contactors, its subcontractors and vendors should comply in applying the retail sales and use taxes in accordance with the legislative change regarding real property contracts and jobs occurring in Virginia.

The audit will be returned to the appropriate field audit staff for revisions in accordance with this determination. A revised audit report and revised bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balances should be paid within 60 days of the bill dates to avoid additional interest charges. The Taxpayers should remit payment to:  Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.

The Code of Virginia sections and regulation 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, please contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

(1) That is, a retailer as defined in Title 23 VAC 10-210-410 G.

AR/645.R