September 22, 2020
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 January 2015 through December 2017. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an out-of-state medical care center owner and operator with numerous locations in Virginia. As a result of the Department’s audit, the Taxpayer was assessed use tax on fees incurred in connection with the purchase of sign contracting services for its locations in Virginia. The Taxpayer appeals the assessment on the grounds that the fees incurred during the sign installation process resulted from real property installation services from a contractor and not the purchase of tangible personal property. With its appeal, the Taxpayer provides invoices from its sign contractor for the audit period that were not provided to the auditor. In addition, the Taxpayer requests an adjustment to the interest and waiver of the assessed penalty.
DETERMINATION
Manufactured Signs
The Department’s policy and treatment of sign manufacturing and installation businesses within Virginia during the audit period is well established. Effective July 1, 2005, Virginia Code § 58.1-602 included manufactured signs in its definition of tangible personal property. In Public Document (P.D.) 12-70 (3/5/2012), the Department explains the change, noting that the intent of the law change was to treat a transaction for the sale and installation of a manufactured sign as a sale of tangible personal property regardless of the fact that the sign may be attached to or become part of real property.
The inclusion of manufactured signs in the Virginia Code § 58.1-602 definition of tangible personal property and the legislative intent supersedes Title 23 of the Virginia Administrative Code (VAC) 10-210-4070 A, which states “Any person who constructs and installs signs, billboards or similar items which, upon installation, become incorporated into realty is a contractor with respect to such items. No tax is applicable to the charge for constructing and installing a sign which becomes attached to realty, but the person constructing and installing the item must pay the tax on all property used in the construction and installation.” The Taxpayer cites Title 23 VAC 10-210-4070 A in support of its claim that its contracted sign installation was a real property transaction. The Taxpayer’s reliance on the regulation is erroneous, and the contracted sign and installation expenses at issue are deemed a purchase of tangible personal property.
Service Charges Related to Sign Installation
The Taxpayer requests the Department remove the invoiced permit fees, permit procurement fees, and survey expenses on the basis that these fees and expenses are associated with real property installation. P.D. 12-70 addresses taxable services resulting from the manufacture and installation of signs onto a structure.
Virginia Code § 58.1-604 imposes a use tax based on the cost price of tangible personal property used or consumed in Virginia, and Virginia Code § 58.1-602 states the cost price is computed in the same method as the sales price. The “sales price” defined under Virginia Code § 58.1-602 means “the total amount for which tangible personal property or services are sold, including any services that are part of the sale … without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.” As stated in P.D. 12-70, “unless specifically exempt by law, any services provided in connection with the sale of tangible personal property are subject to taxation. See P.D. 98-71 (4/20/1998).”
Virginia Code § 58.1-602 lists the exclusions from the sales price of taxable tangible personal property transactions, and Virginia Code § 58.1-609.5 lists service exemptions. As stated in P.D. 12-70, “[f]or any part of the sales price to be exempted from the tax, the service or expense must be expressly stated in an exemption or exclusion statute.” With the appeal, the Taxpayer submitted invoices it received from the contracted sign installation company. The invoices show the total itemized charges to the Taxpayer, of which “permit fees,” “permit procurement fees,” and “installation” are clearly stated.
The exclusions from the “sales price” under Virginia Code § 58.1-602 include cash discounts allowed and taken, certain finance charges related to credit extended on conditional sale contracts, etc. The pertinent service exemptions under Virginia Code § 58.1-609.5 include separately stated transportation charges and separately charged installation or repair charges. There is no specific exemption or exclusion in the law that allows charges for permits or site surveys to be exempted or excluded from tax when such charges are part of the sale of tangible personal property.
In accordance with the guidance published in P.D. 12-70, the true object of the transaction must be analyzed before determining the applicability of the exclusions in Virginia Code § 58.1-602 and § 58.1-609.5. The Attorney General of Virginia has held that “when the true object of a transaction is the acquisition of a good and the service provided is incidental to that purchase, there is a connection between the sale and service that allows the imposition of the sales tax on the service. See 2011 Op. Va. Att’y Gen. 068. P.D. 12-70, citing Title 23 VAC 10-210-4040 D, states “a transaction will constitute an exempt service if the object of the transaction is to secure a service and the tangible personal property that is transferred to the customer is not critical to the transaction. On the other hand, if the object of the transaction is to secure the property, then the entire charge, including the charge for any services, is taxable.”
The taxpayer in P.D. 12-70 appealed the Department’s use tax assessment on its invoiced charges for permits and site surveys on the grounds that the charges should not be considered part of the sale. With regard to the taxpayer in P.D. 12-70, the Tax Commissioner determined that the permit fees and site survey fees were subject to taxation on the basis that: (1) the sign installation was a sale of tangible personal property, (2) a statutory exemption did not apply, and (3) the true object of the transaction was the sale of tangible personal property. The same is true in this case. The true object of the Taxpayer’s purchase is to obtain tangible personal property, the sign. Therefore, permit fees, permit procurement fees, and surveys fees made in connection with or related to the sign are taxable as part of the sale.
Installation Charges
The Taxpayer’s invoices from its contractor included separately stated installation charges. In accordance with Virginia Code § 58.1-609.5 2, the tax does not apply to “amounts separately charged for labor or services rendered in installing…property sold.” The audit will be adjusted to remove the separately stated and invoiced installation labor charges.
CONCLUSION
The audit will be revised by the appropriate field audit staff in accordance with this determination. Interest will be adjusted accordingly, and the applicability of the compliance and amnesty penalties will be determined based on the revision to the audit. Once the revision and adjustments are complete, a revised audit report will be provided to the Taxpayer. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill. Please remit payment within 60 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.
The Code of Virginia sections, regulation and public documents 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 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/1944.W