Tax Type
Retail Sales and Use Tax
Description
Construction; Installation of Spiral Staircases
Topic
Taxability of Persons and Transactions
Date Issued
11-09-1992
November 9. 1992
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear***************
This will reply to your letter of September 4, 1991 in which you seek correction of a recent sales and use tax assessment to your client,************** (the "Taxpayer") for the period January 1988 through November 1990.
FACTS
The Taxpayer, a manufacturer of spiral staircases, sells the staircases to various customers and uses them in real property construction contracts. It was recently audited and found to have failed to remit use tax on staircases withdrawn from inventory and used in its real property construction contracts. The auditor found that the Taxpayer was operating as a dual capacity fabricator under Virginia Regulation (VR) 630-10-27 E.
The Taxpayer maintains that it is primarily engaged in the sale of a stair system, not in the construction business and that the fact that the Taxpayer installs some of the staircases should have no bearing on the tax treatment of such sales. He maintains further that the installation process involves to a greater extent the labor of the customer's crew and to a lesser extent the assistance of any of the Taxpayer's employees. He points out that customers are required, among other things, to provide labor for the off-loading, ingress, and placement of the stair. In addition, the Taxpayer offers customers a 20 minute instructional video on installation. The Taxpayer suggests that he received misinformation from the department regarding the taxability of various transactions a few years ago.
The Taxpayer contests the assessment but has agreed to consider paying the tax only on the raw materials value (13% of the total "installed" costs).
DETERMINATION
VR 630-10-27 E addresses the application of the tax to persons operating both as fabricators and as contractors and provides that "[a]ny person who is principally [greater than 50%] fabricating tangible personal property for sale or resale shall" be treated as a retailer. This section further provides that, as a retailer, if the Taxpayer "withdraws tangible personal property from inventory for use and consumption in the performance of real property construction contracts," he will be liable for tax based upon the fabricated cost (cost of materials, labor and overhead charged to work in process) of the property withdrawn (since he will be acting as a contractor and thus is deemed the ultimate consumer of tangible personal property).
In the instant case, the Taxpayer sells staircases at retail or on an installed basis in real property construction. While the Taxpayer maintains that customers' crews are involved in the installation of the staircases to a much greater extent than the Taxpayer's crews and thus he is not engaged in the construction business, this is irrelevant since Va. Code §58.1-610 requires that:
-
- any person who contracts...to perform construction, ...installation,...or any other service with respect to real estate..., and in connection therewith to furnish tangible personal property...shall be deemed to have purchased such tangible personal property for use or consumption.
- any person who contracts...to perform construction, ...installation,...or any other service with respect to real estate..., and in connection therewith to furnish tangible personal property...shall be deemed to have purchased such tangible personal property for use or consumption.
Since the Taxpayer does not install the majority of its products, I find that it falls within the classification of operating in a "dual capacity" and must collect/pay the tax as specified above. While the retail sales and use tax statutes make no reference to dual capacity fabricators/contractors, the above regulation interpreting the statutory provisions relating to contractors and fabricators has been in existence for a number of years.
In the audit, the Taxpayer was held liable for the tax on the fabricated cost price of staircases sold on an installed basis both within and outside Virginia. The Taxpayer argues that since it does not maintain an inventory of staircases and makes them only on special order it should have to pay the tax only on the prefabricated lumber withdrawn for use in fabricating such staircases and not on the fabricated cost price. Under the above regulation, materials for fabrication in a specific real estate construction contract are taxable on their purchase price only when purchased by persons who are principally fabricating tangible personal property for their own use and consumption in real estate construction contracts; however, the fabricated cost price concept continues to apply when materials are purchased in bulk for fabrication into products both for the fabricator/contractor's own use and for sale to other consumers.
In the instant case, the Taxpayer is principally fabricating tangible personal property for sale or resale and thus is required to remit use tax based on the fabricated cost price of the staircases withdrawn. In the audit since the manufactured (fabricated) cost prices of the staircases were not readily available, the auditor, after subtracting out costs of outside installation, established a figure of 85% of the sales price of such staircases to be the average manufactured (or fabricated) cost. Thus, if the Taxpayer can provide proof that this percentage was inaccurate, I may be willing to revise the assessment
Finally, the Taxpayer suggests that he was informed by a field representative in 1988 that sales outside the state of Virginia, including installation, prefinishing, and delivery were exempt from the tax. However, it is not at all clear that the field representative had full knowledge of the Taxpayer's business activities as her role was merely to assist the Taxpayer in completing past due sales tax returns. By contrast, the regulations applicable to the Taxpayer's business have been in existence for a number of years and have been readily available. As such, I find no basis for revision based on this argument.
Accordingly, I find no basis for revision of the assessment, unless the Taxpayer can provide documentation showing that the percentage used by the auditor for the fabricated cost price of staircases sold in connection with real estate construction projects is inaccurate. Such documentation should be provided to the department's Technical Services Section, P. O. Box 1880, Richmond, Virginia 23282 within 45 days of the date of this letter. If such documentation is not received within the allotted time period, the assessment will be due and Payable.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5591H
Rulings of the Tax Commissioner