May 27, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of ***** (the “Taxpayer”), in which you contest the retail sales and use tax assessments issued for the period October 2009 to June 2014. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates as a real property construction contractor. An audit by the Department resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property used or consumed in the Taxpayer’s operations. The Taxpayer takes exception to the use tax assessed on several items held in the audit. In addition, the Taxpayer states in the appeal that two items held in the audit involved payments to subcontractors in connection with a construction project.
DETERMINATION
Fixed Assets
The Taxpayer contests the inclusion of Items 4-7 on the asset exceptions list. The Taxpayer states in the appeal that Item 4 is a computer that was purchased in 2007 and is outside the scope of the audit. I will agree to remove this item from the audit as the Taxpayer has provided sufficient documentation to show that the asset was purchased in 2007, prior to the audit period.
The Taxpayer states that Items 5-7 are duplicates of the first 4 items on the asset exceptions list. It appears that Items 5-7 are in fact the sums of other items on the exceptions list. Therefore, Items 4-7 should be removed from the audit.
Subcontractor Payments
Title 23 of the Virginia Administrative Code 10-210-410 A provides that:
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 be a prime contractor or a 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.
The regulation states that tangible personal property that is incorporated into real property is considered to be used or consumed by the contractor. Generally, sales and leases of tangible personal property to contractors are taxable because contractors are the users or consumers of all tangible personal property furnished to them or by them in connection with real property construction, installation, repair and similar contracts. As such, contractors cannot claim the resale exemption on such purchases or leases of property.
The Taxpayer contests the inclusion of Item 8 on the fixed assets exceptions list. The Taxpayer states that the item is a contract made with a subcontractor for a construction project, in which the Taxpayer was the general contractor. The Taxpayer provided sufficient documentation to prove that the contract between the subcontractor and the Taxpayer was related to a real property contract in which the subcontractor provided and installed a roof for a chemical storage building. The Taxpayer was the general contractor for the chemical storage building project and the subcontractor was hired to fabricate and install the roof. Therefore, the payment made to the subcontractor should not be included in the asset exceptions list because the Taxpayer would not be responsible for the tax lability related to the materials purchased, fabricated, and installed by the subcontractor. Pursuant to the regulation cited above, the subcontractor was the user or consumer of the tangible personal property used in the fabrication of the roof and is responsible to pay the sales tax to its vendors or to accrue and remit the use tax on the materials used in the installation of the roof.
The Taxpayer also contests the inclusion of another contract made with a subcontractor on a construction project. The Taxpayer has provided the invoices from the Taxpayer to the subcontractor with the appeal. The Taxpayer states that the payments made to the subcontractor were for the fabrication of material and for labor related to the subcontractor’s installation of real property. Based on the documentation provided by the Taxpayer, the payments made to the subcontractor should be removed from the audit. Similar to the above construction contract, the subcontractor, not the contractor (the Taxpayer in this case), is responsible to pay the sales tax to its vendors or to accrue and remit the use tax on the materials used in the installation with respect to real property. The Taxpayer in this case is not responsible because it is not the user or consumer of the tangible personal property used in the installation. In both instances, the subcontractor, not the Taxpayer, was responsible for paying sales tax to its vendors or remitting the use tax to the Department.
CONCLUSION
The audit will be returned to the appropriate field audit staff to make the adjustments in accordance with this determination. Once the adjustments are complete, revised bills with interest accrued to date will be issued to the Taxpayer. The bills should be paid within 30 days of the bill dates to avoid the accrual of additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****.
The regulation cited and other reference documents 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 determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1562H