Tax Type
Retail Sales and Use Tax
Description
Construction; Application of sales and use taxes; Water purification and treatment
Topic
Taxability of Persons and Transactions
Date Issued
11-10-1994
November 10, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear**************
This will reply to your letter of June 29, 1994 in which you seek a ruling on the application of the tax to a number of current and anticipated transactions.
FACTS
**********(the Taxpayer) is located in Virginia and performs a number of functions relating to the construction, installation and servicing of water purification and water treatment facilities. The Taxpayer describes four transactions and asks for clarification on how the tax will apply in each case.
RULING
Item 1: Construction and delivery of water deionization system
In this case, the Taxpayer has subcontracted with a government contractor to build and deliver a specialized water treatment system for installation at a federal government facility located in Maryland. Under the terms of the contract, the Taxpayer provides supervision of the system's installation and startup, but actual installation is done by the contractor.
Based on the documents submitted with your correspondence, it appears that the water deionization system becomes real property upon installation. As indicated in Virginia Regulation (VR) 630-10-27(A), "the law treats every contractor as the user or consumer of all tangible personal property [which becomes real property upon installation] furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts."
-
- That same regulation further provides that:
Tangible personal property incorporated in real property construction which loses its identity as tangible personal property and becomes real property is deemed to be tangible personal property used or consumed by the contractor. Any sale ... for such a contractor is deemed a sale ... for the ultimate consumer (the contractor), and not for resale by the contractor. The dealer (supplier) making the sale ... for such a contractor must collect the tax from him. No sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency ....
- That same regulation further provides that:
Bear in mind, however, that if the system had been sold to a contractor for installation in Virginia, or if the contractor had taken possession of the system in Virginia, the Taxpayer would be required to collect the tax from the contractor on the total sales price.
Item 2: Sale and installation of drinking water Purification system
In this transaction, the Taxpayer has contracted with the federal government to provide all labor, materials and equipment to install a two-part water purification system. This system is comprised of specialized filters and ultraviolet sterilizers which are installed in the customer's drinking water system at a location in the District of Columbia. Further, I understand that prior to its installation, the Taxpayer takes possession of the equipment in Virginia.
As in Item 1 above, it appears that this water purification system becomes real property upon installation. Because the Taxpayer has contracted to furnish and install property which becomes real property upon installation, the Taxpayer in this transaction is operating as a real property contractor as addressed in VR 630-10-27.
As discussed above, a real property contractor is required to pay the tax on purchases of property which become realty upon installation. No exemption is available merely because the Taxpayer has contracted with the federal government. Further, that the property will be installed outside Virginia has no bearing on the Taxpayer's liability since the Taxpayer has taken possession of the property in Virginia.
However, the enclosed Public Document 94-70 (3118194) addresses a transaction in which a Virginia contractor furnishes and installs property in the District of Columbia pursuant to a real property contract with the federal government. In that ruling the department determined that the contractor's purchases of such property was exempt of the tax pursuant to the temporary storage exemption set out in Code of Virginia §58.1-609.2(1). The same exemption applies to the Taxpayer in the instant case. Accordingly, the Taxpayer may purchase the equipment used in the purification system exempt of the tax by providing its suppliers with a Certificate of Exemption, Form ST-11A (sample enclosed). Furthermore, no tax is collected from the customer on this real property transaction.
As a precaution, the District of Columbia is one of the few jurisdictions which allow government contractors to make their purchases exempt of the tax. For example, if a similar water purification system were installed at a government location in Maryland, the Taxpayer would be required to pay the Virginia tax on its purchases (assuming that the Taxpayer first took possession of that property in Virginia). For more information on the issue of temporary storage, please see the enclosed Public Documents 87-196 (8/19187) and 89-281 (10/26/89).
Item 3: Water treatment services for the Commonwealth of Virginia
In this transaction the Taxpayer enters into a service contract with the Commonwealth to provide water treatment services and chemicals at specific locations. Invoices to the government are billed at a set monthly charge.
As indicated in the enclosed Public Document 93-181 (819193), contractors who perform services for the government are deemed to be the users and consumers of all tangible personal property used to provide those services. Accordingly, the Taxpayer would be required to pay the tax on the cost price of all tangible personal property, including chemicals, used to provide water treatment services to the Commonwealth.
Furthermore, this application of the tax would apply to all contractors providing those same services, regardless of whether the contractors are located inside or outside Virginia.
Item 4: Small water treatment devices offered to the general public
In these transactions, the Taxpayer intends to sell water treatment devices (water softeners and ultra violet lights) to the general public. As contemplated, the devices would be installed by an independent contractor. The Taxpayer would collect full payment from the customer and subsequently pay the subcontractor for installation of the devices.
In the attached Public Document 85-94 (4130185), the department addresses the application of the tax to water softening equipment. In that case it was determined that the equipment became real property upon installation; therefore, the taxpayer operated as a real property contractor and was advised to pay the tax on equipment and installation supplies.
Assuming that the water treatment devices in your case also become real property upon installation, the application of the tax would be as described in that ruling. Conversely, if the devices remain tangible personal property upon installation, the devices may be purchased exempt of the tax under the resale exemption. In that instance the Taxpayer would charge and collect the tax from its customers. Charges for installation services would not be taxable provided such charges are separately stated.
I understand that the Taxpayer has been in contact with the department's******* District Office regarding some of these issues and that subsequent meetings are anticipated. Hopefully, the Taxpayer and the department's representatives will be able to resolve whether the equipment in this case becomes real property and also determine the correct application of the tax.
I trust that this information and the enclosed documents are helpful. If you have any questions regarding this letter, you may contact
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8201I
Rulings of the Tax Commissioner