Document Number
95-154
Tax Type
Retail Sales and Use Tax
Description
Contractor purchases of property used by a public service common carrier
Topic
Taxability of Persons and Transactions
Date Issued
06-13-1995
June 13, 1995



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


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

This will reply to your letter of January 13, 1994 in which you seek correction of sales and use tax assessed to***************(the "Taxpayer"), for the period November 1990 through June 1993.
FACTS

The Taxpayer, as a general contractor, entered into contracts with the Washington Metropolitan Area Transit Authority (WMATA) to furnish and install transformers and other electrical equipment for use in railway operations in Virginia, Maryland and the District of Columbia. WMATA, created by federal law under Article XVI of Public Law 89-774 which provides its tax exempt status, is regulated as a common carrier of passengers by railway within the Washington Metropolitan area. The property upon which tax is assessed was purchased for use in the performance of real property contracts and received in Virginia prior to its distribution to various job sites within Virginia, Maryland, and the District of Columbia. The audit produced an assessment for the Taxpayer's failure to remit use tax on the property purchased in the performance of its real property contracts.

The Taxpayer protests the assessment of tax based on its reliance upon WMATA's exemption from taxation as a governmental authority. The Taxpayer asserts that WMATA provided a valid exemption certificate and therefore the property purchased to satisfy the terms of the contracts qualify for exemption.
DETERMINATION


Code of Virginia §58.1-609.1(4) provides an exemption from the sales and use tax for "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States."

Virginia Regulation (VR) 630-10-24.4, copy enclosed, specifically addresses the tax treatment of purchases by WMATA. WMATA enjoys a sales and use tax exemption under federal law on all tangible personal property and services purchased or leased by it.

Code of Virginia §58.1-610 makes construction contractors the taxable users or consumers of all tangible personal property purchased, used, or stored in Virginia in connection with real property contracts. As such, whenever a construction contractor purchases or takes delivery of tangible personal property in Virginia for use in a real property contract, the tax is due. This includes instances in which the tangible personal property will ultimately be affixed to real estate located outside of Virginia. (See Commonwealth v. Miller Morton. 220 VA. 852, 263 S.E. 2d 413 (1980) which held taxable the storage of tangible personal property in Virginia even though the property would ultimately be shipped outside of the state.)

However, exceptions to the general contractor rule are provided in §58.1-610(B) and (E) for property purchased by or furnished to a contractor that would otherwise enjoy certain "industrial" exemptions, including the exemption in §58.1-609.3(3) for "tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railway, for use or consumption by such common carrier directly in the rendition of its public service."

Since the transformers and the related electrical equipment are used directly in the rendition of a public service by a railway common carrier and could be purchased exempt from the tax by such common carrier, l find basis to remove the tax from these items as exempt sales for resale. However tools, supplies, and other property purchased by the Taxpayer for its use in the installation of the transformers and the related equipment are subject to the tax.

This decision is consistent with the Tax Commissioner's ruling in P.D. 89-350 (12/20/89) which allowed a real property contractor engaged in the construction of an electric generating plant to purchase tangible personal property exempt of the tax when the other party to the contract is a public service corporation which enjoys exemption from the sales tax on its purchases for use in the rendition of its public service.

Accordingly, the audit working papers will be returned to the auditor for revision reflecting the policy set forth in this ruling and you will receive a revised audit report and assessment. The remaining balance of the audit assessment should be paid at that time to avoid the accrual of additional interest charges.

I have enclosed the cited statutes, regulation, and prior ruling for your information. Should you have additional questions, you may contact**************. in the Office of Tax Policy at*****************.
                        • Sincerely,


                          Danny M. Payne
                          Tax Commissioner




OTP/7611J

Rulings of the Tax Commissioner

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