February 9, 2021
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 to the Taxpayer as a result of an audit for the period July 2017 through December 2018. I apologize for the delay in responding to your request.
FACTS
The Taxpayer operates as a consuming contractor. An audit by the Department resulted in an assessment of consumer use tax on untaxed purchases of tangible personal property used or consumed in the Taxpayer’s operations. The Taxpayer did not separately state the labor and material costs on its invoices. Instead, one lump sum amount was charged for each sale. To address this, the auditor applied 37.73% of the total sales price to determine the taxable materials portion of each sale. The Taxpayer appeals, contending that the material percentage used by the Department should have been close or equivalent to 10% and that the amount of tax already paid should be sufficient to satisfy any liability.
DETERMINATION
Virginia sales and use tax law generally treats businesses that sell and install tangible personal property that becomes real property upon installation as contractors. See Virginia Code § 58.1-610 A and Title 23 of the Virginia Administrative Code 10-210-410. Contractors are considered to be the consumers of all tangible personal property that they install for their customers. As such, contractors are required to either pay sales tax on all items they are installing at the time they purchase those items or accrue use tax on such items if it is unclear whether the items would be resold or installed at the time of purchase. See Public Document (P.D.) 17-139 (6/29/2017).
The Taxpayer does not dispute its classification as a consuming contractor, or that tax was not properly charged and collected based upon that designation. Instead, the Taxpayer asserts that the Department overestimated the taxable materials cost, and based upon the correct materials cost, the proper amount of use tax for the audit period has already been paid.
While the tangible personal property used by a contractor is subject to tax, separately stated installation charges are not. See Virginia Code § 58.1-609.5 2. However, exempt service charges are subject to tax when combined and billed in a lump sum with taxable charges, such as those for tangible personal property. Here, the Taxpayer’s invoices reflected one lump sum charge, subjecting the entire sale to the retail sales and use tax.
The Department’s auditor, however, attempted to separate out the taxable and potentially non-taxable charges by calculating the materials cost to be 37.73% of the total sales price. The Department’s auditor used this percentage because it was provided by the Taxpayer and was consistent with other internal and tax-related documents. The Taxpayer asserts, without providing any additional evidence, that the assessment was incorrect because the taxable materials costs were close or equivalent to 10% of the total sales price. However, I cannot accept the Taxpayer’s position without documented proof or evidence.
Accordingly, the assessment at issue is upheld. The Taxpayer will receive an updated bill, which will include accrued interest to date. Payment should be made within 60 days of the date on the bill to avoid the accrual of additional interest.
The Code of Virginia sections, regulation, and public document 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 or concerns regarding this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2119-C