95-80 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Construction; Industrial Development Authority as contractor

Topic

Taxability of Persons and Transactions

Date Issued

04-12-1995

April 12, 1995

Re: Request for Ruling: Retail Sales and Use Tax

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

This will reply to your letter of March 27, 1995 in which you request a ruling regarding the application of the retail sales and use tax to certain contractual arrangements involving your client, ******** (the "Taxpayer").

FACTS

The Taxpayer is currently engaged in the manufacture of film products, with facilities located in another state. The Taxpayer intends to contract for the construction of and operate a manufacturing facility (the "facility") in Virginia. The facility will produce foam products through a special blending operation. The final product, a foam sheet, will be sold to automobile parts manufacturers for use in producing interior parts for automobiles.

In constructing the facility, the Taxpayer plans to contract with the local Industrial Development Authority ("IDA") as general contractor, with the Taxpayer serving as construction manager or contracting with a third party to serve as construction manager. In either event, the Taxpayer would be involved directly or indirectly in a number of aspects of managing and supervising the construction. All materials used in constructing the facility would be purchased directly by and billed to the IDA on its credit pursuant to official IDA purchase orders using IDA funds. IDA would furnish these materials to the subcontractors for use in construction. The IDA directly would contract with subcontractors and suppliers, and its credit would be bound in the performance of those contracts.

You request the following rulings: (1) the Taxpayer qualifies as an "industrial manufacturer" during the facility's construction and operation phase; (2) the IDA's purchase of materials for construction of the facility is exempt from Virginia sales and use taxes where (a) the IDA serves as the facility's general contractor and (b) the Taxpayer owns the facility and land during the construction phase and afterwards during the operation phase; and (3) the IDA's purchase of materials for construction of the facility is exempt from Virginia sales and use taxes where (a) IDA serves as the facility's general contractor, (b) the Taxpayer owns the land and leases it to the IDA during the construction phase, (c) IDA owns the facility and leases it to the Taxpayer during the construction phase, and (d) upon completion on the construction, the Taxpayer acquires the facility from IDA for the operation phase.

RULING

Ruling #1: Industrial Manufacturer

Code of Virginia §58.1 -609.3(2) and Virginia Regulation (VR) 630-10-63 provide an exemption from the retail sales and use tax for machinery, tools, and other items used directly in industrial manufacturing or processing of tangible personal property for sale or resale. Code of Virginia §58.1-602 provides that the term "industrial in nature" shall include all businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual.

A review of the SIC Manual reveals that businesses engaged in manufacturing film products are classified in SIC Code 3861. Furthermore, businesses engaged in manufacturing plastics foam products are classified in SIC Code 3086. Therefore, these activities are deemed to be industrial in nature, and the Taxpayer qualifies as an industrial manufacturer during the facility's construction and operation phase. Equipment and other items used predominantly and directly in these activities qualify for the industrial manufacturing exemption.

Ruling #2: Taxpayer Owns Facility and Land During Construction

Sales tax: Before construction on the facility begins, the Taxpayer would purchase the land and any existing improvements from the IDA. The Taxpayer, as owner of the project, would pay the cost of constructing the facility.

The Taxpayer would contract with the IDA as general contractor, which in turn would hire and contract with subcontractors to construct the facility. All materials used in constructing the facility would be purchased directly by and billed to the IDA on its credit pursuant to official IDA purchase orders using IDA funds. The IDA would furnish the materials to the subcontractors for use in construction. The IDA's credit, and not the Taxpayer's, would be bound in the performance of the contracts. The Taxpayer would pay funds to the IDA as and when the IDA presents its draw requests; the IDA would pay the subcontractors and suppliers, if it has not already done so.

The IDA was created pursuant to Code of Virginia §15.1-1373 et seq. Code of Virginia §15.1 - 11374 provides that an Industrial Development Authority is a political subdivision. As such, the IDA qualifies for the sales and use tax exemption provided in Code of Virginia §58.1 -609.1 (4) for tangible personal property for use or consumption by political subdivisions of Virginia. In furnishing the materials to subcontractors, the IDA is making "use" of the property; it is exercising a right or power over the property incident to its ownership. Therefore, purchases of tangible personal property by the IDA may be made exempt of the sales tax provided the purchases are pursuant to required official purchase orders and paid for out of public funds.

The information provided states that all purchases by the IDA would be made pursuant to official purchase orders. The facts presented also indicate that the Taxpayer will pay funds to the IDA as and when the IDA presents draw requests. In order to meet the requirement that the purchases be paid for out of public funds, the Taxpayer must make payment on the draw requests solely to the IDA, and the IDA must pay the subcontractor or supplier by a separate check.

Use tax: Generally, contractors are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract and are liable for use tax on property furnished by the other party to their contracts, and on which no sales tax was previously paid. However, an exception to the general rule is set forth in subsection B of Code of Virginia § 58.1-610 for property furnished to a contractor that would otherwise enjoy one of the governmental exemptions under Code of Virginia §58.1 -609.1 (4). Under this subsection, and as clarified in Virginia Regulation (VR) 630-10-27, contractors are not subject to the use tax when provided with tangible personal property purchased by a government entity for use in real property construction contracts.

In the scenario presented, the IDA (a political subdivision of the Commonwealth) will furnish the materials to the subcontractors for use in construction. As explained above, the IDA may purchase the materials exempt of the sales tax pursuant to Code of Virginia § 58.1 -609.1 (4) provided that the purchases are made pursuant to official purchase orders to be paid out of public funds. Under Code of Virginia §58.1 -610(B) and VR 630-10-27, the subcontractors will not be liable for use tax on the materials furnished by the IDA.

Please note that purchases made by the subcontractors, rather than by the IDA, in connection with the real property construction contracts will generally be subject to the tax. Only in instances where the credit of the IDA is bound directly and the subcontractor has been officially designated as the purchasing agent for the IDA will such purchases be deemed exempt from the tax. See VR 630-10-27(J).

Ruling #3: IDA Owns Facility During Construction

The facts are the same as in Ruling #2 above, except the IDA would hold title to the facility at all times during construction, while the Taxpayer would own the land. During the construction phase, the Taxpayer would lease the land to the IDA pursuant to a nonexclusive ground lease, and the IDA would lease the facility to the Taxpayer pursuant to a separate nonexclusive building lease. Both leases would provide for nominal rent from the respective tenants. Under either lease, the Taxpayer would pay any customary operating or maintenance expenses and any properly assessed real estate taxes. The IDA would construct the facility on its own behalf as owner and general contractor.

Construction materials would be purchased by the IDA on its own account or through an official purchasing agent. Thus, the IDA's credit would be bound on every purchase. The Taxpayer would acquire title to the facility from the IDA after construction is completed.

Under the applicable statutes and regulations, and for the reasons cited in Ruling #2, the construction material purchases by the IDA may be made exempt of the sales and use tax, provided the purchases are made pursuant to official purchase orders and paid for out of public funds. In the alternative, where the credit of the IDA is bound directly and a subcontractor has been officially designated as the purchasing agent for the IDA, such purchases will be deemed exempt from the tax.

The lease payments are not subject to the sales and use tax, as they are pursuant to a lease for real property and not tangible personal property.

Please note that this ruling is limited to the application of the sales and use tax to transactions set forth in your letter. It is not intended to address the authority of the IDA to engage in the activities described.

If you have any questions regarding this ruling, you may contact**************.

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

OTP/9496F

Rulings of the Tax Commissioner