Tax Type
Retail Sales and Use Tax
Description
Carpet and floorcovering sales and installation
Topic
Taxability of Persons and Transactions
Date Issued
06-05-1985
June 5, 1985
RE: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of March 25, 1985, in which you submit an application for correction of sales and use tax assessments issued to your clients as the result of recent audits.
FACTS
****** ("Taxpayers") are engaged in providing and installing carpet and floorcoverings for customers. The taxpayers' customers are primarily residential construction companies and all installations of carpet and floorcoverings are made in new homes. The taxpayers do not install carpeting or floorcoverings for the general public.
Recent audits of the taxpayers produced assessments for their failure to collect the sales tax from customers for whom installations of carpeting and floorcoverings were provided. In addition, the department's assessments included purchases by the taxpayers of supplies used in the installation of carpeting and floorcoverings upon which the tax was not previously paid.
The taxpayers contest the assessments issued by the department, asserting that the policy statement upon which the sales tax assessments were based was contrary to the law which it interpreted and was not promulgated under the provisions of the Administrative Process Act, rendering such policy statement void and without force. With respect to purchases of supplies, the taxpayers assert that taxes paid to other states should be credited against the assessments, that some tax may have been collected from the taxpayers by their suppliers and paid to the state, and that the department should proceed against those suppliers registered to collect the tax, but who failed to do so in this case. In addition, the taxpayers assert that a portion of the assessments Were assessed outside the three year statute of limitations. Alternatively, the taxpayers argue that if the assessments for their failure to collect the tax from customers is found to be in order, the method used by the department's auditors to compute taxable sales price was invalid.
DETERMINATION
Prior to July 1, 1980, Section 58-441.15(d) of the Code of Virginia (now Virginia Code Section 58.1-610.D) provided:
Tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section.
Effectively, the above statute provided that any person who furnished and installed tangible personal property which became a part of real estate was to treat himself as a contractor and remit the sales and use tax on all materials furnished by him as part of contracts. However, a 1980 legislative change deleted the period at the end of Virginia Code 58-441.15(d) and added the following language:
provided, however, that a person selling...floor coverings (as distinguished from the floors themselves)...shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items.
Consistent with the 1980 statutory change, the department published Sales and Use Tax Policy Statement 80-4, which stated that persons who sell and install floor coverings (as distinguished from the floors themselves) were retailers and should collect the tax from their customers. From the date of its issuance, this policy statement reflected the official policy of the department until the publication of Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations on January 1, 1985. As Virginia Code Section 58-48.6 provided the Tax Commissioner with the power to issue general policy statements prior to January 1, 1985, without complying with the Administrative Process Act, Policy Statement 80-4 is valid and binding in this case.
Based upon Policy Statement 80-4, the taxpayers were to treat themselves as retailers with respect to the furnishing and installation of "floorcoverings (as distinguished from the floors themselves)." However, the taxpayers were able under the policy statement to continue to treat themselves as contractors with respect to the furnishing and installation of floors. The department has traditionally used the test of permanent affixation to realty to distinguish between floors and floorcoverings; i.e. flooring that is affixed to realty in such a way as to be easily removable without material injury to the flooring or the realty below is that which should be deemed sold at retail. Flooring which is not easily removed is deemed to be consumed by the seller when installed.
Examples of floorcoverings which do not become permanently affixed to realty include carpet installed by the tack strip method or laid loose and vinyl floorcovering tacked or glued on the edges only or laid loose. Examples of floorcoverings which become permanently affixed to realty include carpeting and vinyl floorcovering fully glued down.
Based upon the foregoing, only that carpeting or floorcovering not permanently affixed to realty should be included in the instant audits. That floorcovering permanently affixed to realty will be removed from the audits if information is submitted by the taxpayers to permit such revisions.
With respect to carpeting and floorcoverings which do not become permanently affixed to realty, the department is willing to entertain any alternate computation of sales price that the taxpayers feel would be more accurate than the fifty percent profit margin used in its audits.
As to purchases by the taxpayers included in the department's audits, Virginia Code Section 58.1-625 does require dealers to collect and remit the tax; however, the incidence of the tax is upon the purchaser, United States v. *****, 442 F.Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1918). Accordingly, the tax may properly be assessed against either the suppliers or purchaser. Inasmuch as the taxpayers may be assessed the tax in this case and there is no evidence that the tax was collected and remitted to the department by the taxpayers' suppliers, I must conclude the assessments here to be proper. If the taxpayers possess evidence that the tax was paid to suppliers, such evidence should also be submitted to the department. In addition, under the provisions of Virginia Code Section 58.1-611, tax properly paid to other states on items included in the department's audits will be credited toward the taxpayers' liabilities upon the provision of documentation. As set forth .n Section 630-10-29 of the Retail Sales and Use Tax Regulations, the credit does not apply to tax erroneously charged or incorrectly paid to another state. For instance, a credit is not available when a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer, who incorrectly charges out-of-state tax.
Lastly, the assessment of taxes in this case for periods longer than three years is justified under the provisions of Virginia Code Section 58.1-634. This statute extends the period of limitations for assessments to six years when returns have not been filed but when the department has reasonable cause to believe that returns should have been filed. The period of limitations was extended by our auditors in this case because returns were not filed by the taxpayers and just cause existed under|Policy Statement 80-4 that returns were required.
The possible revisions outlined above will be made upon the submission of necessary information to the department's Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282 within sixty days. If such information is not provided, the instant assessments will be deemed due and payable in full.
I have enclosed a copy of Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations, which sets forth the application of the tax to the instant taxpayers on and after January 1, 1985. As noted in subsection G of the regulation, a person who sells and installs floorcoverings (as distinguished from floors) is considered to be a retailer if he maintains a retail or wholesale place of business from which sales are made, an inventory of floorcoverings, and provides installation as part of sales of floorcoverings. If a person selling and installing floorcoverings does not meet these criteria, he is deemed to be a contractor for purposes of the regulation. The taxpayers should henceforth treat themselves in accordance with Regulation 630-10-27.G for purposes of the sales and use tax. Please feel free to contact the department if any questions arise as to the correct application of the regulation to the taxpayers or if a hearing is desired in this case.
Sincerely,
W. H. Forst
Tax Commissioner
RE: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of March 25, 1985, in which you submit an application for correction of sales and use tax assessments issued to your clients as the result of recent audits.
FACTS
****** ("Taxpayers") are engaged in providing and installing carpet and floorcoverings for customers. The taxpayers' customers are primarily residential construction companies and all installations of carpet and floorcoverings are made in new homes. The taxpayers do not install carpeting or floorcoverings for the general public.
Recent audits of the taxpayers produced assessments for their failure to collect the sales tax from customers for whom installations of carpeting and floorcoverings were provided. In addition, the department's assessments included purchases by the taxpayers of supplies used in the installation of carpeting and floorcoverings upon which the tax was not previously paid.
The taxpayers contest the assessments issued by the department, asserting that the policy statement upon which the sales tax assessments were based was contrary to the law which it interpreted and was not promulgated under the provisions of the Administrative Process Act, rendering such policy statement void and without force. With respect to purchases of supplies, the taxpayers assert that taxes paid to other states should be credited against the assessments, that some tax may have been collected from the taxpayers by their suppliers and paid to the state, and that the department should proceed against those suppliers registered to collect the tax, but who failed to do so in this case. In addition, the taxpayers assert that a portion of the assessments Were assessed outside the three year statute of limitations. Alternatively, the taxpayers argue that if the assessments for their failure to collect the tax from customers is found to be in order, the method used by the department's auditors to compute taxable sales price was invalid.
DETERMINATION
Prior to July 1, 1980, Section 58-441.15(d) of the Code of Virginia (now Virginia Code Section 58.1-610.D) provided:
Tangible personal property incorporated in real property construction which loses its identity as tangible personal property shall be deemed to be tangible personal property used or consumed within the meaning of this section.
Effectively, the above statute provided that any person who furnished and installed tangible personal property which became a part of real estate was to treat himself as a contractor and remit the sales and use tax on all materials furnished by him as part of contracts. However, a 1980 legislative change deleted the period at the end of Virginia Code 58-441.15(d) and added the following language:
provided, however, that a person selling...floor coverings (as distinguished from the floors themselves)...shall be deemed to be a retailer of such items and not a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items.
Consistent with the 1980 statutory change, the department published Sales and Use Tax Policy Statement 80-4, which stated that persons who sell and install floor coverings (as distinguished from the floors themselves) were retailers and should collect the tax from their customers. From the date of its issuance, this policy statement reflected the official policy of the department until the publication of Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations on January 1, 1985. As Virginia Code Section 58-48.6 provided the Tax Commissioner with the power to issue general policy statements prior to January 1, 1985, without complying with the Administrative Process Act, Policy Statement 80-4 is valid and binding in this case.
Based upon Policy Statement 80-4, the taxpayers were to treat themselves as retailers with respect to the furnishing and installation of "floorcoverings (as distinguished from the floors themselves)." However, the taxpayers were able under the policy statement to continue to treat themselves as contractors with respect to the furnishing and installation of floors. The department has traditionally used the test of permanent affixation to realty to distinguish between floors and floorcoverings; i.e. flooring that is affixed to realty in such a way as to be easily removable without material injury to the flooring or the realty below is that which should be deemed sold at retail. Flooring which is not easily removed is deemed to be consumed by the seller when installed.
Examples of floorcoverings which do not become permanently affixed to realty include carpet installed by the tack strip method or laid loose and vinyl floorcovering tacked or glued on the edges only or laid loose. Examples of floorcoverings which become permanently affixed to realty include carpeting and vinyl floorcovering fully glued down.
Based upon the foregoing, only that carpeting or floorcovering not permanently affixed to realty should be included in the instant audits. That floorcovering permanently affixed to realty will be removed from the audits if information is submitted by the taxpayers to permit such revisions.
With respect to carpeting and floorcoverings which do not become permanently affixed to realty, the department is willing to entertain any alternate computation of sales price that the taxpayers feel would be more accurate than the fifty percent profit margin used in its audits.
As to purchases by the taxpayers included in the department's audits, Virginia Code Section 58.1-625 does require dealers to collect and remit the tax; however, the incidence of the tax is upon the purchaser, United States v. *****, 442 F.Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1918). Accordingly, the tax may properly be assessed against either the suppliers or purchaser. Inasmuch as the taxpayers may be assessed the tax in this case and there is no evidence that the tax was collected and remitted to the department by the taxpayers' suppliers, I must conclude the assessments here to be proper. If the taxpayers possess evidence that the tax was paid to suppliers, such evidence should also be submitted to the department. In addition, under the provisions of Virginia Code Section 58.1-611, tax properly paid to other states on items included in the department's audits will be credited toward the taxpayers' liabilities upon the provision of documentation. As set forth .n Section 630-10-29 of the Retail Sales and Use Tax Regulations, the credit does not apply to tax erroneously charged or incorrectly paid to another state. For instance, a credit is not available when a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer, who incorrectly charges out-of-state tax.
Lastly, the assessment of taxes in this case for periods longer than three years is justified under the provisions of Virginia Code Section 58.1-634. This statute extends the period of limitations for assessments to six years when returns have not been filed but when the department has reasonable cause to believe that returns should have been filed. The period of limitations was extended by our auditors in this case because returns were not filed by the taxpayers and just cause existed under|Policy Statement 80-4 that returns were required.
The possible revisions outlined above will be made upon the submission of necessary information to the department's Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282 within sixty days. If such information is not provided, the instant assessments will be deemed due and payable in full.
I have enclosed a copy of Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations, which sets forth the application of the tax to the instant taxpayers on and after January 1, 1985. As noted in subsection G of the regulation, a person who sells and installs floorcoverings (as distinguished from floors) is considered to be a retailer if he maintains a retail or wholesale place of business from which sales are made, an inventory of floorcoverings, and provides installation as part of sales of floorcoverings. If a person selling and installing floorcoverings does not meet these criteria, he is deemed to be a contractor for purposes of the regulation. The taxpayers should henceforth treat themselves in accordance with Regulation 630-10-27.G for purposes of the sales and use tax. Please feel free to contact the department if any questions arise as to the correct application of the regulation to the taxpayers or if a hearing is desired in this case.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner