July 20, 2021
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you protest the sales and use tax assessment issued to ***** (the “Taxpayer”) as a result of an audit for the period June 2014 through December 2017. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, an out-of-state subcontractor that fabricates and installs steel stairs, gates, and rails for commercial real property construction projects in Virginia, purchased the raw materials for its fabrication work exempt of the sales and use tax. For the period at issue, the Taxpayer did not include, collect or remit sales tax from the general contractor. Instead, the Taxpayer relied upon the general contractor to remit the tax upon completion of the final project. As a result of the Department’s audit, the Taxpayer was assessed use tax on the cost of the materials used to fabricate the metal work provided in the performance of its contracts. The Taxpayer appeals, contending it purchased the raw materials exempt from the tax under a resale certificate and the sales tax was remitted general contractors based on the Taxpayer’s invoices.
DETERMINATION
Fabricating Contractors
Virginia Code § 58.1-610 A provides that:
Any person who contracts orally, in writing, or by purchase order, to perform construction, 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.
Virginia Code § 58.1-602 defines the term “sale” to include “the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication…” Title 23 VAC 10-210-560 A defines fabrication as “[a]n operation which changes the form or state of tangible personal property…”
The Department has traditionally held that tangible personal property that is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property’s form or state is considered to have been fabricated. These operations are deemed to be a taxable fabrication service in accordance with the statute and regulation cited, and the charge for such services is subject to the sales tax.
In this case, the Taxpayer purchased raw materials and utilizes machinery to transform these materials into stairs, gates and railings that are then installed into commercial real property. Pursuant to Title 23 VAC 10-210-560, the Taxpayer was engaged in fabrication. Because the fabricated tangible personal property was used by the Taxpayer in real property contracts, it was also a consuming contractor under Virginia Code § 58.1-610 A. As a consuming contractor, the Taxpayer is responsible for paying the sales or use tax on the purchase of raw materials.
The Taxpayer asserts that the general contractors were remitting the tax on its behalf. Pursuant to Title 23 VAC 10-210-410 A “a contractor, whether he be a prime contractor or subcontractor, does not pass the sales or use tax on to anyone else as a tax. He will take the amount of the tax into consideration in submitting bids”. Based on the cited authorities, the Taxpayer is responsible for compliance with the retail sales and use tax laws regarding its real property construction projects in Virginia.
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.
The Code of Virginia sections 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, please contact ***** in the Office of Tax Policy, Appeals, and Rulings at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1691.A