93-225 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Government contractor; Materials delivered to Virginia for future use in North Carolina job

Topic

Property Subject to Tax

Date Issued

11-16-1993

November 16, 1993

Re: §58.1-1821 Application: Sales and Use Tax

Dear******************

This will reply to your letter of August 3, 1993 to *********of our ********District Office. I feel it appropriate to treat your letter as an application for correction under Va. Code §58.1-1821.

FACTS

As a result of a recent audit, the taxpayer contests sales and use tax assessed on materials used in the fabrication of structural components which it in turn will incorporate into a governmental
facility in North Carolina. The taxpayer argues that it qualifies for the contractor's "temporary storage" exemption set out in Va. Code §58.1-609.3 (1) as North Carolina law provides for the refund of sales and use tax paid by contractors on governmental projects.

DETERMINATION

Va. Code §58.1--609.3 (1) provides an exemption from the sales and use tax for:

- Personal property purchased by a contractor which is used solely in another state or foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or foreign country, and which is stored temporarily in Virginia pending shipment to such state or foreign country.

It is well established under Virginia law that exemptions from taxation must be strictly construed and where there is doubt, the issue must be resolved in favor of the taxing authority. Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).

North Carolina law does not provide an exemption for purchases by contractors in connection with governmental construction contracts. However, North Carolina Code §105-164.14 (c) does provide that:

- the Secretary of Revenue shall make refunds annually to all governmental entities ... of sales and use tax paid ... by such governmental entities on direct purchases of tangible personal property. and use tax liability indirectly incurred by such governmental entities on building materials, supplies, fixtures and equipment which shall become a part of or annexed to any building or structure being erected, altered or repaired which is owned or leased by such governmental entities shall be construed as sales or use tax liability incurred on direct purchases by such governmental entities and such entities may obtain refunds of such taxes indirectly paid.

The taxpayer relies on this provision in support of its argument for the Virginia contractor's "temporary storage" exemption. The Virginia exemption requires that a contractor be able to purchase property free of the sales tax in another state; the taxpayer argues that the refund provided under North Carolina law effectively creates a tax free purchase. However, it is not necessary to address this point as the economic benefit of the refund provision falls squarely on the North Carolina governmental entity, rather than the contractor.

Under North Carolina law, the contractor very clearly must pay the sales and use tax on property used in governmental contracts. As such, the taxpayer has not met the statutory requirement that the property be eligible for tax free purchase in another state and the appeal therefore must be denied. Penalty assessed with respect to this particular North Carolina contract will be abated, however, and a revised notice of assessment will be mailed to the taxpayer under separate cover. In order to avoid the accrual of additional interest, the revised assessment must be paid within 30 days of its issuance.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner