Tax Type
Employer Income Tax Withholding
Retail Sales and Use Tax
Description
Out-of-state contractor; Failure to withhold tax from wages
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Withholding of Tax
Date Issued
07-29-1993
July 29, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This will reply to your letters of January 26, 1993 and March 19, 1993 in which you seek correction of a retail sales and use tax assessment and a withholding tax assessment for *********(the Taxpayer").
FACTS
The Taxpayer is a plumbing contractor located in another state. The Taxpayer has performed plumbing contracts in Virginia, and has had items it purchased from suppliers shipped into Virginia for use in those contracts.
You are contesting an assessment of use tax on the Taxpayer's purchases of tangible personal property shipped in Virginia, claiming the Taxpayer was unaware that taxes were due to Virginia or that it needed an exemption certificate to purchase the materials exempt from tax. You claim that the Taxpayer paid taxes on its purchases to its home state. You believe the supplier should be responsible for the taxes it failed to charge and are requesting that the department abate the assessment.
You also protest the assessment of withholding taxes for employees doing work in Virginia. You maintain that the employees were not residents of Virginia and that withholding taxes were paid to their state of residence because you were unaware that taxes were required to be paid to Virginia.
DETERMINATION
Use tax: Va. Code §58.1-604 imposes a use tax on "the cost price of each item or article of tangible personal property used or consumed in this Commonwealth." Va. Code §58.1-610 provides that any person who contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate is deemed to be the taxable user or consumer of any property furnished in connection with the work. As such, the taxpayer performing the work does not collect the sales tax from his customer but instead pays the tax when purchasing the tangible personal property.
Consistent with the foregoing, Virginia Regulation (VR) 630-1027(A) provides that "if a supplier of a contractor doing work in Virginia does not collect the Virginia tax from the contractor, the contractor will be liable for the use tax on his purchases from the supplier." As a plumbing contractor, the Taxpayer is the user and consumer of the materials purchased. Because the Taxpayer's supplier failed to charge sales tax on the items purchased, the Taxpayer is responsible for payment of the use tax on its purchases of tangible personal property used in Virginia.
You contend that the assessment should be issued to your supplier, because the supplier knew the Taxpayer did not have an exemption certificate for Virginia. While dealers are legally required to collect and remit the sales tax on all sales or leases of tangible personal property, Va. Code §58.1-625 makes the tax the legal debt of the purchaser. This has been recognized by the federal courts, which have held that "the legal incidence of the Virginia sales and use tax is on the purchaser." United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd 569 F.2d 811 (4th Cir. 1978).
You also dispute the assessment based on the fact that the materials purchased in Virginia were not billed from the supplier's Virginia branch but were billed from an out-of-state location. However, the place of billing is not relevant to the imposition of the sales and use tax. In this case, the property was used in Virginia; that is the determinative factor for use tax purposes.
A person who has paid a "similar tax" in another state on the purchase or use of property purchased outside Virginia is entitled to a credit against the tax on the use of that property in Virginia. Va. Code §58.1-611. Although the Taxpayer claims to have paid sales taxes to another state on the materials brought into Virginia, there has been no evidence presented to show such payments. If the Taxpayer can provide documentation showing the payment of the applicable tax to another state, the department will allow the appropriate credit.
Withholding tax: The Virginia individual income tax is imposed on nonresidents to the extent that they acquire income from Virginia sources. Because the employees in question performed services in Virginia, they are liable for the income tax.
It is well established under Virginia law that an employer is required to withhold tax from wages paid to an individual, whether a Virginia resident or nonresident, who performs or performed any service in Virginia for wages. The employer is required to withhold an amount equal to the employee's income tax liability. See Va. Code § 58.1-461.
In this case, it is clear that the Taxpayer failed to withhold Virginia income tax from the wages of its employees who performed contracting services in Virginia. Therefore, the auditor properly assessed tax, penalty and interest in accordance with Va. Code §58.1-475
Offer: You offer to pay use and withholding taxes for 1992 and future years if the department will abate the assessments for prior years. However, because the assessments are not of doubtful liability or collectibility, as required under Va. Code §58.1-105, I cannot accept your offer.
Accordingly, the withholding tax assessment is correct as made and is now due and payable. If you can provide documentation showing that sales tax was paid to another state on the purchases in question, the department will compute the appropriate credit against the use tax assessment. If the requested information is not received within 30 days, collection action will resume.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6724F
Rulings of the Tax Commissioner