87-112 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Construction contracts

Topic

Payment and Refund

Rate of Tax

Taxability of Persons and Transactions

Date Issued

03-31-1987

March 31, 1987

Re: Request for Ruling/Sales and Use Tax

Dear **************************

This will reply to your letter of February 26, 1987. in which you request a ruling on two questions relating to the transitional provisions of the recent 1/2 % sales and use tax rate increase as they relate to bona fide real estate construction contracts.

§58.1-639.A of the Code of Virginia provides that refunds of the additional 1/2 % sales and use tax paid on and after January 1, 1987 are available for qualifying purchases made pursuant to bona fide real estate construction contracts. The term "bona fide contract" is defined within the statute as including "those contracts that are entered into prior to the date of enactment of the increase in the state sales and use tax rate, provided that such contracts include plans and specifications." Pursuant to §58.1-639.B of the Code of Virginia, when a bona fide real estate construction contract contains a specific and stated date of completion, refunds will be available provided that "the date of delivery...(is) before the completion date of the applicable project.

Your first question relates to the application of the transitional provisions in the event that the completion date of a bona fide real estate construction contract is extended due to weather delays, changes in the scope of a project, delays in obtaining materials, etc. The intent of the transitional provisions was to hold contractors and other purchasers or lessees of tangible personal property harmless for the additional 1/2 % tax they will pay under contracts or leases entered into before the rate increase. As such, the provisions benefit those persons who are contractually unable to modify such contracts or leases. In this case, however, the parties are able to modify the construction contracts that they have entered into.

As the parties are able to modify the original contract terms, the transitional provisions will apply only to that property delivered prior to the completion date originally specified in the bona fide contract.

In addition, the provisions will apply only to property furnished pursuant to the original contract. Therefore, if the contract is amended after October 27, 1986 (the date the rate increase was enacted) to change the scope of the project, refunds will not be available for the additional property furnished by the contractor.

While the department's emergency regulations do not reference contract extensions or additions, Virginia Regulation 630-10-106, §4 does address analogous situations with respect to leases. Specifically, the regulation states that:

- if the lessee assigns the lease, or if the property is turned over to anyone else, refunds of the additional 1/2 % tax will not be available for tax paid after the (rate) change. In addition, refunds will not be available if there are replacements of the property leased (except for replacements due to defective goods), if additional property is added to the lease, or if the lease is renegotiated or renewed. Emphasis added

Your second question relates to what completion date a subcontractor must adhere to for purposes of the transitional provisions, the date stated in his contract with the general contractor or the date stated in the contract between the general contractor and the owner. As the subcontractor is bound only by his contract with the general contractor, the completion date specified in that contract is binding.

If you have any further questions on the transitional provisions, please do not hesitate to contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner