Tax Type
Retail Sales and Use Tax
Description
Contractors; Modular home manufacturer
Topic
Taxability of Persons and Transactions
Date Issued
02-10-1993
February 10, 1993
Re: Ruling Request: Retail Sales and Use Tax
Dear***************:
This is in reply to your letter of February 12, 1992 in which you request guidance as to the proper application of Virginia sales and use tax to the operations of***********( the "Taxpayer").
FACTS
The Taxpayer is a dual role contractor which manufactures modular homes from an operation located in Virginia. These homes are primarily produced for suburban residential markets located both within Virginia and surrounding states. Following its manufacture, each modular home is delivered to its permanent site and affixed to the foundation by the Taxpayer's set crew or by an independent contractor hired by the Taxpayer.
In addition to the modular homes, the Taxpayer also produces housing panels. These panels are produced in the same facility as the modular homes and are sold as tangible personal property to construction contractors for their use in construction projects both inside and outside of Virginia.
The Taxpayer does not purchase its materials in a "job-specific" manner. That is, at the time of purchase, the Taxpayer is not able to determine whether materials will be incorporated in a home remaining in Virginia, a home destined for out-of-state delivery, or housing panels. The Taxpayer has requested a response to questions relative to its operations.
RULING
In that there is a series of questions in your letter, I will address them below in the sequence written.
1. In circumstances where the Taxpayer delivers a completed modular home to a site in Virginia and affixes the unit to the foundation with a set crew consisting of its own employees or independent contractors, is the Taxpayer acting as a construction contractor subject to the provisions of Virginia Regulation (VR) 630-10-27?
In that the Taxpayer is manufacturing modular homes which it will incorporate in real property, it would be considered a contractor with respect to real estate. As such, in accordance with VR 63010-27, it would be considered a construction contractor subject to the tax as the ultimate consumer of tangible personal property used and consumed in the installation of the modular homes.
2. Assuming the answer to question (1) is affirmative, what is the specific Virginia use tax base applicable to the completed modular home? Virginia adopted any separate provisions applicable to the modular home industry as opposed to ?
Any person who is principally a fabricator of tangible personal property for its own use will generally use material and supply cost as the base to compute the applicable tax when manufacturing a modular home. However, when a person is principally fabricating tangible personal property for sale or resale, Virginia Regulation (VR) 630-10-27(E) provides that:
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- Any person who withdraws tangible personal property from inventory for use and consumption in the performance of real property construction contracts is liable for the tax based on the fabricated cost price of the tangible personal property withdrawn. Fabricated cost price is computable by totaling the cost of materials, labor, and overhead charged to work in process. Freight inward at the plant is treated as an element of the cost of the materials. (Emphasis added.)
- Any person who withdraws tangible personal property from inventory for use and consumption in the performance of real property construction contracts is liable for the tax based on the fabricated cost price of the tangible personal property withdrawn. Fabricated cost price is computable by totaling the cost of materials, labor, and overhead charged to work in process. Freight inward at the plant is treated as an element of the cost of the materials. (Emphasis added.)
The department has not adopted separate provisions applicable to the modular home industry in that present regulations adequately addresses industry concerns.
3. Again assuming that the response to question (1) is generally affirmative, if the set crew utilized by the Taxpayer consists of independent contractors rather than its own employees, must any particular relationship or contractual provisions exist between the Taxpayer, the set crew, and the developer-purchaser in order for the Taxpayer to retain status as a construction contractor rather than a vendor of tangible personal property?
If the Taxpayer has entered into a real estate contract with a developer-purchaser to install a modular home, the Taxpayer is considered a construction contractor and is the ultimate consumer of tangible personal property used in manufacturing and affixing the home to realty regardless of whether it uses its own employees or a subcontractor to physically install the home.
4. With respect to modular homes manufactured in Virginia but delivered to an out-of-state location and subsequently affixed to the foundation, are there any Virginia sales or use tax implications with either the materials incorporated or the sale of the homes? Does the method or terms of delivery affect the response to this question?
VR 630-10-51(B) provides that:
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- The tax applies to the first use in Virginia of tangible personal property purchased elsewhere in a transaction which would have been taxed had the transaction occurred in Virginia, regardless of the fact that such property may have been, or may be used in interstate commerce. (Emphasis added.)
- The tax applies to the first use in Virginia of tangible personal property purchased elsewhere in a transaction which would have been taxed had the transaction occurred in Virginia, regardless of the fact that such property may have been, or may be used in interstate commerce. (Emphasis added.)
Therefore, if modular homes are manufactured by the Taxpayer for installation by its employees or subcontractors, the Taxpayer, as a construction contractor, is subject to the tax on materials used and consumed in the manufacturing of the modular home since first use of the material occurred in Virginia. In this instance, the terms for delivery of the home out-of-state do not exempt the tax on materials used in manufacturing the home.
However, if the Taxpayer sold at retail and delivered the modular home to an out-of-state developer for installation the developer, the Taxpayer may purchase exempt of the tax materials used to manufacture the mobile home. Furthermore, the sales price of the modular home would be exempt from the tax in that an interstate commerce transaction has occurred.
5. If no Virginia sales and use tax is due on modular homes delivered out-of-state, what documentation must the Taxpayer maintain for audit purposes?
If a modular home is sold at retail and delivered out-of-state for installation by the customer, no sales tax would be charged. In such cases, proper documentation would include but not be limited to the following:
_ Notation on the sales invoice of the out-of-state location to which the home was shipped.
_ Supporting shipping documents to verify out-of-state location to which the home was shipped.
_ Sufficient customer contracts or files to verify that the transaction was a retail sale instead of a construction contract project.
6. Must the Taxpayer collect Virginia sales tax on sales of housing panels to Virginia construction contractors?
In that the Taxpayer makes retail sales of housing panels, in accordance with VR 630-10-84.1, it must collect the tax on the sale of housing panels to its customers.
7. If the answer to question (6) is affirmative, is Virginia sales and use tax due on materials purchased by the Taxpayer and incorporated into the panels?
Concerning dual role contractors who primarily fabricate tangible personal property for their own use and consumption but who also make retail sales, VR 630-10-27(E) provides in part that:
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- Any person who is principally fabricating tangible personal property for his own use and consumption in real property construction contracts shall apply the tax according to subsection (D) above. In addition, persons who sell tangible personal property to consumers must register, collect, and pay the tax on the selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible personal property which can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to this supplier. If at later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to credit for the tax paid to the suppliers since the transactions are separate and distinct taxable transactions. (Emphasis added.)
- Any person who is principally fabricating tangible personal property for his own use and consumption in real property construction contracts shall apply the tax according to subsection (D) above. In addition, persons who sell tangible personal property to consumers must register, collect, and pay the tax on the selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible personal property which can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to this supplier. If at later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to credit for the tax paid to the suppliers since the transactions are separate and distinct taxable transactions. (Emphasis added.)
8. Under the circumstances described, is the Taxpayer eligible for a direct pay permit under the provisions of Virginia Sales & Use Tax Regulation 630-10-34?
From the information presented it appears the Taxpayer would qualify for use of the direct payment permit. However reasonable care and judgement must be exercised in the use of this permit. If the Taxpayer misuses the permit, it will be liable for tax, penalty and interest not paid because of the misuse and may also have its permit revoked.
9. Are there any other Virginia Sales & Use Tax provisions pertinent to the Taxpayer which have not been addressed in this correspondence?
In that the Taxpayer is a manufacturer, some of its equipment used directly in the manufacturing may meet the manufacturing exemption as provided in Va. Code §58.1-608(A)(3) and VR 630-10-63. If the Taxpayer manufactures primarily for its own use, such items would be subject to the tax. However, if the Taxpayer manufactures primarily for sale or resale, such items would be exempt from the tax. Lastly, if the Taxpayer has equipment which it uses in both a taxable and an exempt manner, the preponderance of use will determine its taxable status.
If you have further questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5965N
Rulings of the Tax Commissioner