Tax Type
Retail Sales and Use Tax
Description
Steel fabrication by contractor
Topic
Taxability of Persons and Transactions
Date Issued
12-11-1985
- December 11, 1985
RE: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letters of September 7 and December 6, 1984, and the issues raised in your meeting of December 11, 1984 with departmental representatives, in which you request the correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
***** is engaged in the fabrication of steel both for its own use in real estate construction projects and for sale to customers. A recent audit of ***** produced an assessment for the failure to properly remit the sales and use tax on steel and other raw materials used in the fabrication of items for its own use in out-of-state construction projects.
Inasmuch as the percentages of steel fabricated for its own use and for sale to others were virtually equal and ***** had been claiming the manufacturing exemption upon raw materials and fabrication machinery used, the department's auditors applied the provisions of Section 630-10-27.E of the Virginia Retail Sales and Use Tax Regulations relating to fabricators who produce tangible personal property primarily for sale or resale as opposed to for their own use in real property construction. The regulation provides that such fabricators should remit the tax on withdrawals of tangible personal property from inventory for use in real estate construction contracts based upon the fabricated cost price of the property withdrawn.
contests the imposition of tax based upon the ruling of the Circuit Court for the City of Roanoke in Roanoke Iron & Bridge Works, Inc. v. Department of Taxation as that case involved a similar factual situation to the instant case. In addition, ***** asserts that certain property used in its own real estate construction contracts could have been purchased tax exempt in the state of erection and was therefore exempt from the tax under the provisions of Virginia Code Section 58.1-61O.F. Alternatively, ***** contends that if its use of steel for use in real estate construction contracts is indeed taxable, the tax should be computed on the cost of raw materials inasmuch as the concepts of Regulation §630-10-27.E are inapplicable to ***** as it maintains no inventory of steel.
DETERMINATION
It is asserted that the department's action in this case is controlled by the opinion of the Circuit Court for the City of Roanoke in Roanoke Iron & Bridge Works, Inc. v. Commonwealth (1978). In its opinion, the court concluded that a steel fabricator who produces property both for his own use in real estate construction and for sale or resale was exempted from the tax when he fabricated steel for his own use in out-of-state construction contracts.
The department appealed the court's opinion to the Virginia Supreme Court, which denied such appeal on procedural grounds. Inasmuch as the appeal was not denied on the merits of the case, the department has not acquiesced its position except in the circuit involved.
A review of established Virginia case law reveals the use of fabricated steel in Virginia by ***** to be taxable, notwithstanding the fact that such steel may later be erected in another state. Section 58.1-610.A of the Code of Virginia provides that "[a]ny person who contracts to perform construction...and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption." Accordingly, the taxable event involving the purchase of steel by ***** occurs when ***** takes delivery of the steel in Virginia. The Virginia Code Section 58.1-608.20 exemption for the "delivery of tangible personal property outside this State for use or consumption outside the State" is inapplicable because the first use of the steel occurred in Virginia. Further, no exemption is available because the out-of-state delivery statute was designed "to avoid the possible constitutional problems involved in taxing interstate sales," Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980). As ***** is the user or consumer of steel, no sale in interstate commerce takes place.
Based upon the foregoing, I do not feel compelled to accept the opinion of the circuit court in Roanoke Iron & Bridge as the controlling interpretation of the law in this matter.
In addition, it is asserted that steel purchased for use in certain contracts was exempt from the sales and use tax under the provisions of Virginia Code Section 58.1-610.E, which states:-
- Personal property purchased by a contractor which is used solely in another state or in a foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or in such foreign country and is stored temporarily in Virginia pending shipment to such state or country, shall not be subject to the sales or use tax.
Based upon the statute above, all purchases by ***** which could have been purchased by ***** exempt from tax in the state of their erection will be removed from the department's audit. The numbers of the contracts ***** involved have been provided; however, ***** will need to furnish the department with the names of the parties to those contracts so that their tax exempt status may be verified.
I also find basis for the relief of a portion of the assessment based upon Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations. ***** was assessed the sales and use tax in this case based upon the "fabricated cost price" of steel used by it in the performance of real estate construction contracts. The assessment based on fabricated cost price resulted from a reading of subsection E of Regulation §63O-10-27, relating to fabricators who produce property both for their own use in real estate construction contracts and for sale or resale:-
- Any person who is principally fabricating tangible personal property for sale or resale...(and) who withdraws tangible personal property from inventory for use or consumption in the performance of real property construction contracts is liable for the tax based on the fabricated cost price of the tangible personal property withdrawn.
The above provisions must be read in light of the entire regulation though, since subsection B of the regulation provides that a person fabricating both for his own use or consumption and for sale or resale "may not purchase under a resale exemption certificate any tangible personal property which he knows at the time of purchase will be furnished by him in connection with any specific contract."
It has been testified that ***** purchased steel on a job-by-job basis. Therefore, it is known at the time of purchase whether ***** will act as a fabricating seller or contractor with respect to each purchase.
Accordingly, ***** should purchase steel for resale under an exemption certificate, but should remit the tax on the sales price of steel purchased for use in its own construction contracts. Thus, ***** should only be assessed tax on the cost of the raw materials themselves.
Based upon the foregoing, the assessment issued to ***** will be revised to reflect the imposition of tax on the cost of raw materials used rather than on fabricated cost price.
Lastly, I find basis for the relief of penalty. The information requested above relating to contracts exempt in other states should be provided to our Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282 within the next 45 days. Upon receipt of such information, the assessment will be revised on the basis of this determination.
Sincerely,
W. H. Forst
Tax Commissioner -
Rulings of the Tax Commissioner