Tax Type
Retail Sales and Use Tax
Description
Materials provided by subcontractor
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
06-13-1994
June 13, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter of September 7, 1993 in which you seek correction of a sales and use tax assessment for****************** (the "Taxpayer") for the period from March 1992 through April 1993.
FACTS
The Taxpayer, a general contractor, was audited and held liable for the applicable consumer use tax on untaxed purchases of materials used in the renovation of two stores located in Virginia.
The Taxpayer contests the assessment relating to use taxes due on materials provided by subcontractors, claiming the tax was paid to the subcontractors. In addition, the contracts between the Taxpayer and the subcontractors provide that the subcontractors were responsible for the payment of all applicable "sales, consumer, use and similar taxes" arising from work performed by the subcontractors. The Taxpayer maintains that the legal incidence of the sales and use tax in question should be placed on the subcontractors pursuant to the contract and because the Taxpayer did not purchase the equipment directly.
DETERMINATION
Va. Code §58.1-610(A) makes construction contractors the taxable user or consumer of all tangible personal property purchased, used, or stored in Virginia in connection with real estate construction contracts. As such, the contractor or subcontractor performing the work does not collect the sales tax from his customer but instead pays the tax when purchasing the tangible personal property.
HVAC and Electrical Work: The fixed price subcontracts between the Taxpayer and the subcontractors for heating, ventilation and air conditioning (HVAC) work and for electrical work clearly state that the subcontractors are to provide all labor, material and equipment necessary to complete the work on the building. Nothing in the subcontracts suggests that the Taxpayer is directly liable for payment on purchases made by the subcontractor under the contract. The Taxpayer agreed to issue joint checks to its subcontractors and the vendors as an accommodation to the subcontractors. The payments were made as part of the fixed price of the contracts and proportionally reduced the amounts available to the subcontractors under the contracts.
Based upon the circumstances presented, it is clear that the subcontractors, not the Taxpayer, purchased the equipment and supplies used to fulfill the contracts. Therefore, the assessment will be corrected to remove the amounts with respect to the contested HVAC and electrical supply purchases made by the subcontractors.
Fabrication: Under Virginia Regulation (VR) 630-10-37, "fabrication" is defined as any operation which changes the form or state of tangible personal property; as such, the tax applies to the total charge for the fabrication. The tax applies to the charges for the fabrication of tangible personal property for users and consumers who furnish either directly or indirectly the materials used for the fabrication. The facts in this case indicate that the subcontractor fabricated steel beams used as shelves in the stores which did not become part of the real property.
Even though the Taxpayer's subcontractors were contractually obligated to pay all applicable sales, consumer, use and similar taxes arising from work performed by the subcontractors, the sales and use tax is imposed upon the ultimate user or consumer of tangible personal property. Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980). Based upon the requirements under VR 630-10-27, the Taxpayer, as a contractor respecting real estate, is the user or consumer of tangible personal property furnished by him in connection with real property construction, reconstruction and similar contracts. Consequently, the tax on the transactions is the legal obligation of the Taxpayer notwithstanding its contractual arrangement with others. Because no tax was paid to the company performing the fabrication operation, the Taxpayer incurred a use tax liability for the total charge for the fabrication, and the auditor properly assessed the tax.
The Taxpayer will be given another opportunity to provide documentation indicating that tax has been paid to Virginia by the fabricating company. The documentation must be in the form outlined by the auditor in prior correspondence.
Professional Services: You maintain that the audit included items which were actually payments for professional services performed to procure permits. However, no documentation has been received to substantiate this claim.
If the Taxpayer provides a copy of the contract with the company which states the type of work performed or invoices indicating that the tax was paid, the audit will be adjusted.
Accordingly, the assessment will be revised to remove the amounts with respect to the contested HVAC and electrical purchases made by the subcontractors. Please submit the requested information relating to the fabrication and professional services issues to the department's Office of Compliance, Audit Review Unit, P.O. Box 615, Richmond, Virginia 23205-0615 within 30 days. If the requested information is not received within 30 days, the information on which the assessment was originally based will be presumed to be the best available and a revised bill will be issued.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7360F
Rulings of the Tax Commissioner