Tax Type
Retail Sales and Use Tax
Description
Contractors; Automatic Bank Tellers and Security Systems
Topic
Taxability of Persons and Transactions
Date Issued
08-07-1991
August 7, 1991
Re: §58.1-1821 Application: Sales and Use Tax
Dear******************
This is in reply to your letter of April 13, 1990, on behalf of ************** (the Taxpayer), seeking correction of the sales and use tax assessments for the period of April 1985 through March 1988.
FACTS
The Taxpayer is in the business of manufacturing, selling and installing automatic teller machines (ATMs), bank security cameras, visual auto tellers, bank security alarms, night depository assemblies and vault doors. The Taxpayer makes retail sales of the above equipment without installation, and also sells and installs said equipment. In both instances, the Taxpayer has treated himself as a retailer and charged the tax on the sales price of the equipment unless the customer was an exempt entity, i.e., school, government entity, etc. The auditor asserted that the Taxpayer is selling and installing tangible personal property that becomes realty after installation, thus making the Taxpayer a using and consuming contractor under Virginia Regulation (VR) 630-10-27(G). The Taxpayer feels the equipment installed by them does not lose its identity as tangible personal property, thus making the Taxpayer a retailer on all equipment sold. The audit liability is the result of the tax being assessed on the cost price of equipment installed by the Taxpayer for exempt entities.
DETERMINATION
VR 630-10-27(G) addresses contractors and retailers who install tangible personal property which becomes real property after installation. This regulation states, in part, the following:
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- A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings (as distinguished from floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items is not classified as a using or consuming contractor with respect to them.
In order to resolve the audit, it must be determined whether the equipment in question remains tangible personal property or becomes a part of the real estate. The Virginia Supreme Court has ruled:
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- Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered..."
Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), and Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345, (1941).
Keeping the above in mind, I will address those items under protest.
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- Visual Auto Tellers and Night Depository Assemblies
It has been the longstanding policy of the department that the above mentioned items become realty upon installation. Not only is this the department's policy, the Taxpayer has been previously informed of the proper tax application with respect to charges for installing such items. As set forth in the department's January 24, 1977 letter (copy enclosed), the Taxpayer "is a consuming contractor for sales and use tax purposes when it enters into agreements to furnish and install the banking vats."
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- Bank Security Cameras and Alarms
In accordance with VR 630-10-17.1 (copy enclosed), charges for monitored security systems constitute charges for a service which are not subject to the tax. Non-monitored systems represent the sale of tangible personal property and would be subject to the tax. I have been informed by the Norfolk District office that no such security equipment has been held taxable in the audit findings.
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- Automatic Teller Machines
It is my understanding that the Taxpayer sells and installs two types of ATMs. The first type are those that are freestanding and are in no way attached to real estate. It is the department's position that this type of machine remains as tangible personal property. No ATMs of this nature were included in the audit.
The second type of the ATM which the Taxpayer sells and installs are those machines that are directly installed in the side of the actual bank building. As I understand, this type of ATM is inserted into a constructed opening on the side to the bank building or structure. The ATMs are secured by removable clamps and may be removed, relocated or replaced without damage to the building or structure. It is also my understanding that once an ATM is removed from the side of a bank building, there remains an opening directly into the bank or the banking structure. It is apparent that an opening of this nature would not be acceptable in the banking industry and another ATM must be installed or the opening must be sealed in order to maintain security.
It is pointed out in your April 13, 1990 correspondence that the Internal Revenue Service considers ATMs "tangible personal property" for purposes of qualifying for the investment tax credit. While this point is well taken, the classification of property as "tangible" for Federal income tax purposes, does not predicate the department's actions in establishing policy as it relates to the retail sales and use tax.
Going back to the tests used by the Virginia Supreme Court to determine whether an item remains tangible or becomes realty, the chief test to consider is the intent of the party installing. It appears apparent based upon the constructed opening of the side of the bank building that the intent is to permanently maintain an ATM in the space provided. Thus, it is the department's position that the ATM equipment is part of the real estate and in selling and installing such equipment the Taxpayer is properly characterized as a using or consuming contractor. Based on the above, the audit findings are proper and the audit liability is now due and payable. If you should have any questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner