Tax Type
Retail Sales and Use Tax
Description
Government transactions; Contractor's purchases on behalf of government
Topic
Taxability of Persons and Transactions
Date Issued
09-27-1993
September 27, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*********************
This will reply to your letters in which you seek correction of a sales and use tax assessment for *************(the "Taxpayer") for the period March 1988 through February 1991.
FACTS
The Taxpayer, a mechanical contractor, entered into contracts with the federal government to perform certain modifications to wind tunnel facilities located in Virginia. In order to perform the required tasks under the contracts, the Taxpayer made purchases of tangible personal property; these items were turned over to the federal government for installation.
As a result of an audit, an assessment was issued for use tax on the purchases. The auditor deemed the Taxpayer to be the consumer of the tangible personal property used in connection with real property construction contracts. The Taxpayer contends that seven of the items purchased were for resale to the federal government and, therefore, should be exempt from the retail sales and use tax.
DETERMINATION
Virginia law generally treats contractors with respect to real estate as the user or consumer of all tangible personal property used in the performance of a contract and thus requires that they pay the sales or use tax on all such purchases.
In determining the proper tax treatment of tangible personal property which is modified and installed on the wind tunnel facilities, it must be determined whether the items remain tangible personal property or become a part of the real estate. The Virginia Supreme Court in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), ruled that:
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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.
- 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.
It should be noted that the Taxpayer is required to collect the tax on sales of the components unless the purchaser is otherwise exempt from the tax. In this case, the ultimate purchaser (the federal government) is exempt from the tax under Va. Code §58.1-609.1(4). In addition, the Taxpayer's purchases of materials which become a part of the building comprising the shell of the wind tunnel facility are taxable to the Taxpayer as the user and consumer of construction materials, in accordance with VR 630-10-27.J.
Because the seven items in question were purchased for resale to the federal government, the Taxpayer is not liable for the sales and use tax. Therefore, the audit will be adjusted in a manner consistent with the foregoing, and a revised notice of assessment will be sent to the Taxpayer under separate cover.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5603F
Rulings of the Tax Commissioner