September 15, 2020
Re: § 58.1-1821 Appeal: Retail Sales and Use Tax
Dear *****:
This will respond to your letter, submitted on behalf of ***** (the “Taxpayer”), in which you appeal the retail sales and use tax assessment issued as a result of an audit for the period of September 2013 through August 2019. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer was engaged in the fabrication and installation of mailboxes at new construction homes in Virginia. During the audit, the Department’s auditor concluded that the Taxpayer was a consuming contractor and, therefore, all materials purchased by the Taxpayer were taxable. The Taxpayer was issued an assessment for untaxed purchases of materials. The Taxpayer contests the Department’s assessment, asserting that its business license classified the Taxpayer as personal services and not as a contractor. The Taxpayer also asserts that the completed mailboxes are real property and not tangible personal property.
DETERMINATION
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 to the extent required by this chapter.
The regulation interpreting this provision, Title 23 of the Virginia Administrative Code (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.
Pursuant to Title 23 VAC 10-210-560, the Taxpayer is engaged in fabrication, which is defined as an operation that changes the form or state of tangible personal property. As the Taxpayer fabricates tangible personal property for use and consumption in real property contracts, the Taxpayer must pay the sales tax or remit the use tax pursuant to Title 23 VAC 10-210-410 D, which states:
A fabricator who contracts to perform services with respect to real estate construction, and in connection therewith to furnish tangible personal property for incorporation in real estate construction thereby causing it to lose its identity as tangible personal property by becoming real property, is classified as a using or consuming contractor and must pay the tax on the cost price of the raw materials which make up such fabricated property. The Tax must be paid at the time of purchase to all suppliers who are authorized to collect the tax. In instances where the supplier is not authorized to collect the tax or fails to collect the tax, the tax must be remitted directly to the Department of Taxation Form ST-7, Consumer's Use Tax Return.
The Department agrees with the Taxpayer in finding that the completed mailboxes are real property. In accordance with the cited authorities, the Taxpayer is clearly a using or consuming contractor in Virginia for retail sales and use tax purposes. Thus, any materials used in the fabrication of the mailboxes would be deemed to have been used and consumed by the Taxpayer. The Taxpayer’s classification with regard to local business license purposes is irrelevant to the Taxpayer’s classification for sales and use tax purposes.
As such, the assessment at issue is upheld. An updated bill with accrued interest to date will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of the bill.
The Code of Virginia section and regulations cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3284.C