Tax Type
Retail Sales and Use Tax
Description
Construction; Manufacturer and Installer of Signs
Topic
Taxability of Persons and Transactions
Date Issued
06-05-1992
June 5, 1992
Re: Request for Ruling: Retail Sales and Use Tax
Dear**************
This will reply to your letter dated April 16, 1991 in which you request a ruling as to your classification with respect to the manufacture and installation of signage products by **********(the Taxpayer).
FACTS
The Taxpayer is a designer and manufacturer of sign and graphic systems and installs a majority of the signs it produces. The Taxpayer was audited for the period January, 1988 through August, 1990 and upon review is considered a contractor with respect to the production and installation of its sign products.
RULING
In determining whether a tangible article used in connection with real estate is to be considered real or personal property, the intent of the purchaser with regard to the tangible article is of major consideration in this instance. (See enclosed PD 88-32 (3/2/88)) The customer purchases a sign for purposes of identifying and directing its clients to its business. At the time of purchase there is neither a question nor a determination of the length of time the business will be a viable concern or the period of time the sign will have a useful value. Thus, the intent of the customer at the time of purchase is permanent in nature.
Therefore, I cannot agree with the Taxpayer's insistence that the majority of its signs produced are temporary in nature and that they serve a limited usefulness to its owners. As stated in the Taxpayer's letter, some of the signs become a part of real estate and/or are mounted to the exterior of the building upon installation. Additionally, during telephone conversations with members of my staff, the Taxpayer indicated that some of its signs are erected on pylons or monuments. In a previous determination, PD 88-171 (6/29/88), copy enclosed, I concluded that signs affixed to the exterior of a building or mounted on pylons or monuments become a part of realty upon installation.
Virginia Regulation (VR) 630-10-100 provides "[a]ny person who constructs and installs signs, billboards or similar items which, upon installation, become incorporated into realty is a contractor with respect to such items. (Emphasis added.) As the Taxpayer also manufactures signs of a stick-on variety that do not become a part of realty upon installation, it is deemed to be operating in a dual role capacity as a manufacturer (retailer) and contractor.
Virginia Regulation (VR) 630-10-27(E), copy enclosed, provides in pertinent part, that "[a] manufacturer...who operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for his own use and consumption in the performance of real property construction contracts shall follow a primary purpose rule based on gross receipts in determining sales and use tax application."
Manufacturers Fabricating Principally for Resale
A manufacturer is deemed to be fabricating principally for sale or resale if more that 50% of his gross receipts are derived from making sales of manufactured products to other customers. Such a manufacturer must add the sales tax to the sales price and collect it from his customers for payment to the state.
Manufacturers Fabricating Principally for Use or Consumption
A manufacturer is deemed to be fabricating principally for his own use or consumption, if more than 50% of his gross receipts are derived from the fabrication of products for his own use in real estate construction. Such a manufacturer is classified as a using and consuming contractor and must pay the tax to his suppliers based on the cost price of the raw materials which make up such fabricated property.
Direct Pay Permits
A manufacturer who fabricates both for sale to customers as well as for its own use and consumption may apply to the department for a direct pay permit, "if the purchases are made under circumstances which normally make it impossible at the time of purchase to determine the manner in which such property will be used." (See VR 630-10-34, copy enclosed.)
Based on the facts presented in this case the Taxpayer is deemed to be principally manufacturing for its own use and consumption in the performance of real property contracts. As such, when the Taxpayer converts any products, the components of which were initially purchased exempt of the tax, to his own use or consumption, he must pay the tax, "based on the fabricated cost, (the cost to the manufacturer) computed by totaling the cost of materials, labor and overhead charged to work in process." (See VR 630-10-37, copy enclosed) However, the Taxpayer has the option to apply to the department for a direct pay permit in which no tax is paid on materials at the time of purchase.
While the Taxpayer has treated all transactions as retail sales and was audited as a retailer in the past, it will begin to apply the tax in accordance with the aforementioned regulations for real property installations on July 1, 1992.
If you have additional questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5127J
Related Documents
Rulings of the Tax Commissioner