Tax Type
Retail Sales and Use Tax
Description
Scope of local sales and use taxes; Tax situs
Topic
Local Taxes Discussion
Date Issued
03-29-1996
March 29, 1995
Re: Request for Ruling: Sales and Use Tax
Dear*******************
This will reply to your letter of June 20, 1995 and subsequent letters seeking a ruling on the application of the retail sales and use tax to commercial modular structures sold by ********(the Taxpayer).
In a factory setting, the Taxpayer constructs commercial modular structures (units) for sale. In a majority of cases, the Taxpayer is contractually responsible for certain installation activities, such as, engaging the services of a crane and operator to remove the units from the trailers and setting them on the foundation, tack welding the unit frames to anchors embedded in the foundation, completing the installation of awnings, canopies, signs, etc., finishing interior and exterior seams when a unit consists of more than one module, removing shipping protection from equipment and starting up the equipment, and completing any applicable punch list items. As part of each sale, the Taxpayer reviews the site and produces drawings of the elevations and locations of utility hookups. However, the site owner is responsible for all site work, such as local engineering, surveying, site approval, excavation, installation of site utilities, footings and foundations, walks, curbs and cuts, landscaping, paving, utility hookups for electrical, water, sewer, gas, telephone, and anything else subject to the local building code. The Taxpayer expects that most of the finished units will be sold and installed outside Virginia.
The Taxpayer seeks a ruling as to whether these units become real property or remain tangible personal property upon installation, and how the tax applies in both instances. The Taxpayer also seeks information on the situs of the sale for determining how to allocate the local portion of the sales or use tax, whether the Taxpayer or site owner is responsible for collecting and remitting the sales or use tax, and when the Taxpayer should self-assess the use tax. In this ruling, l have cited several provisions from the Virginia Retail Sales and Use Tax Regulations ("VR"), copy enclosed.
Real vs. Tangible Property: The Virginia Supreme Court in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), has ruled that
From the information provided, it is apparent that these modular units are affixed to a permanent foundation, adapted to the commercial purpose for which the site is to be used, and normally intended to remain in place indefinitely, i.e., for as long as the business is viable. Based on these facts, prior sales and use tax rulings of the department in closely related cases [see PD's 87-210 (9/15/87) and 85-73 (4/3/85); copies enclosed] and the fact that the units are assessed as real estate for purposes of local taxation in Virginia, I conclude that these units, although designed to be readily relocatable, become part of the realty upon installation.
Tax Application: When the Taxpayer furnishes and installs such units, the Taxpayer is acting as a real property contractor and, thus, is directly liable for the retail sales and use tax on all purchases made in connection with such transactions. Since it also expects to sell some units without installation, the Taxpayer is considered to be operating in a dual capacity of fabricating tangible personal property for sale and fabricating for its own use and consumption in the performance of real property construction. Under such circumstances, the primary purpose provisions set out in subsection E of VR 630-10-27 apply to the Taxpayer.
Based on the information presented, the Taxpayer will be principally (i.e., greater than 50% of the time) fabricating tangible personal property for its own use or consumption in real property construction. Accordingly, for real property installations, the tax is computed on the cost price of raw materials which make up the fabricated unit regardless of whether installed within or outside Virginia. See subsection D of the VR 630-10-27 and PD's 88-152 (6/23/88), 88-196 (7/6/88) and 93-24 (2/10/24), copies enclosed. If the supplier fails to charge the sales and use tax or is not registered to charge and collect the Virginia sales or use tax, the Taxpayer is required to pay and report the 4.5% use tax to the department on all taxable purchases of tangible personal property.
For units sold without installation (i.e., a retail sale), if the Taxpayer can identify at the time of purchase the raw materials which will be resold, then it may purchase such materials exempt of the tax by furnishing a completed resale exemption certificate, Form ST-10, to its supplier for the purchase of such materials. If the Taxpayer is unable to accurately identify at the time of purchase the materials to be resold, the Taxpayer is required to pay the sales tax to the supplier or report and pay the use tax to the department if the supplier is not registered to collect the sales or use tax.
In such instances, where the Taxpayer subsequently sells a unit to a consumer without installation, the Taxpayer must charge the tax on the gross sales price of the unit. The tax applies when delivery is to Virginia customers or to out-of-state customers who take title to, or possession of, the units in Virginia. When making such taxable retail sales, the Taxpayer is responsible for the collection, reporting and remittance of the 4.5% retail sales tax to the department. See VR's 630-10-24 and 630-10-31. However, no credit is allowed for the tax paid to suppliers on the purchase of materials incorporated into the unit.
Direct Payment Permit: If the Taxpayer finds that it is impossible to determine whether the purchased materials will be used for retail sales or real property construction transactions, the Taxpayer may apply to the department for a direct payment permit which would allow the Taxpayer to pay any tax directly to the state and avoid the collection of tax by suppliers. See VR 630-10-34.
Interstate Commerce Exemption: The sales and use tax will not apply to retail sales made in interstate commerce; for example, when the units are sold without installation and delivered by the Taxpayer directly to the purchaser outside of Virginia and no use of the property is made within Virginia (see VR 630-10-51 for examples of other types of exempt interstate commerce transactions). In such instances, it will be the responsibility of the purchaser to pay the other state's sales or use tax, unless such other state requires the Taxpayer to register with it for the collection of its sales or use taxes. Accordingly, the Taxpayer may want to contact the other states in which it plans to do business concerning their sales and use tax registration requirements.
Industrial Production Exemptions: To qualify for the industrial production exemptions, the Taxpayer must be principally or primarily fabricating tangible personal property for sale or resale. As it appears from the information provided that the Taxpayer will be principally or primarily fabricating tangible personal property for its own use or consumption in real property contracts, the Taxpayer is not entitled, at this time, to any of the industrial production exemptions set out in VR 630-10-63.
To determine whether it will be entitled to the industrial production exemptions for subsequent years, the Taxpayer should annually compare the dollar volume of modular units sold with and without installation at the same time each year. If the annual sales comparison establishes that the Taxpayer is primarily producing these units for sale without installation (i.e., primarily a manufacturer), it will be entitled to the industrial production exemptions on a one-year prospective basis.
If reclassified as primarily a manufacturer, the Taxpayer must pay the tax on the "fabricated cost price" of any units installed by the Taxpayer, rather than pay the tax on the cost price of raw materials. See subsection E of VR 630-10-27 which defines fabricated cost price. Otherwise, if the annual review shows that the Taxpayer is primarily selling and installing these structures (i.e., primarily a contractor), then the Taxpayer will not be entitled to the production exemptions and should continue to pay the tax on the cost price of raw materials and production equipment.
Leased Sites: There may be some instances when a unit and the site are not owned by the same person. For example, the owner of the unit may lease the site and be required to remove the unit at the termination of the site lease. In such a situation, the installation of the modular unit could possibly be classified as personalty for Virginia retail sales and use tax purposes, provided the conditions of the lease clearly specify that the lessee is to remove the structure at, or sometime before, the expiration of the lease and the lease term is for less than 80% of the expected life of the structure. In order for the Taxpayer to treat this type of transaction as a retail sale of tangible personal property when the Taxpayer has agreed to perform any part of the installation process, the Taxpayer must obtain and retain a copy of the customer's lease agreement. Absent such proof from its customer, the Taxpayer will be deemed a real property contractor liable for the Virginia sales and use tax in accordance with VR 630--10-27.
Situs of Sale: VR 630-10-84(A) provides the following:
As the Taxpayer has only one place of business which is located in Virginia, the situs of each sale is at such place of business. Accordingly, the locality in which the Taxpayer's place of business is physically located is the locality for which the local 1 % sales tax will apply.
If you have any questions concerning this response, please contact *** of my Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9883R
Re: Request for Ruling: Sales and Use Tax
Dear*******************
This will reply to your letter of June 20, 1995 and subsequent letters seeking a ruling on the application of the retail sales and use tax to commercial modular structures sold by ********(the Taxpayer).
FACTS
In a factory setting, the Taxpayer constructs commercial modular structures (units) for sale. In a majority of cases, the Taxpayer is contractually responsible for certain installation activities, such as, engaging the services of a crane and operator to remove the units from the trailers and setting them on the foundation, tack welding the unit frames to anchors embedded in the foundation, completing the installation of awnings, canopies, signs, etc., finishing interior and exterior seams when a unit consists of more than one module, removing shipping protection from equipment and starting up the equipment, and completing any applicable punch list items. As part of each sale, the Taxpayer reviews the site and produces drawings of the elevations and locations of utility hookups. However, the site owner is responsible for all site work, such as local engineering, surveying, site approval, excavation, installation of site utilities, footings and foundations, walks, curbs and cuts, landscaping, paving, utility hookups for electrical, water, sewer, gas, telephone, and anything else subject to the local building code. The Taxpayer expects that most of the finished units will be sold and installed outside Virginia.
The Taxpayer seeks a ruling as to whether these units become real property or remain tangible personal property upon installation, and how the tax applies in both instances. The Taxpayer also seeks information on the situs of the sale for determining how to allocate the local portion of the sales or use tax, whether the Taxpayer or site owner is responsible for collecting and remitting the sales or use tax, and when the Taxpayer should self-assess the use tax. In this ruling, l have cited several provisions from the Virginia Retail Sales and Use Tax Regulations ("VR"), copy enclosed.
RULING
Real vs. Tangible Property: The Virginia Supreme Court in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), has ruled that
-
- Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test.
From the information provided, it is apparent that these modular units are affixed to a permanent foundation, adapted to the commercial purpose for which the site is to be used, and normally intended to remain in place indefinitely, i.e., for as long as the business is viable. Based on these facts, prior sales and use tax rulings of the department in closely related cases [see PD's 87-210 (9/15/87) and 85-73 (4/3/85); copies enclosed] and the fact that the units are assessed as real estate for purposes of local taxation in Virginia, I conclude that these units, although designed to be readily relocatable, become part of the realty upon installation.
Tax Application: When the Taxpayer furnishes and installs such units, the Taxpayer is acting as a real property contractor and, thus, is directly liable for the retail sales and use tax on all purchases made in connection with such transactions. Since it also expects to sell some units without installation, the Taxpayer is considered to be operating in a dual capacity of fabricating tangible personal property for sale and fabricating for its own use and consumption in the performance of real property construction. Under such circumstances, the primary purpose provisions set out in subsection E of VR 630-10-27 apply to the Taxpayer.
Based on the information presented, the Taxpayer will be principally (i.e., greater than 50% of the time) fabricating tangible personal property for its own use or consumption in real property construction. Accordingly, for real property installations, the tax is computed on the cost price of raw materials which make up the fabricated unit regardless of whether installed within or outside Virginia. See subsection D of the VR 630-10-27 and PD's 88-152 (6/23/88), 88-196 (7/6/88) and 93-24 (2/10/24), copies enclosed. If the supplier fails to charge the sales and use tax or is not registered to charge and collect the Virginia sales or use tax, the Taxpayer is required to pay and report the 4.5% use tax to the department on all taxable purchases of tangible personal property.
For units sold without installation (i.e., a retail sale), if the Taxpayer can identify at the time of purchase the raw materials which will be resold, then it may purchase such materials exempt of the tax by furnishing a completed resale exemption certificate, Form ST-10, to its supplier for the purchase of such materials. If the Taxpayer is unable to accurately identify at the time of purchase the materials to be resold, the Taxpayer is required to pay the sales tax to the supplier or report and pay the use tax to the department if the supplier is not registered to collect the sales or use tax.
In such instances, where the Taxpayer subsequently sells a unit to a consumer without installation, the Taxpayer must charge the tax on the gross sales price of the unit. The tax applies when delivery is to Virginia customers or to out-of-state customers who take title to, or possession of, the units in Virginia. When making such taxable retail sales, the Taxpayer is responsible for the collection, reporting and remittance of the 4.5% retail sales tax to the department. See VR's 630-10-24 and 630-10-31. However, no credit is allowed for the tax paid to suppliers on the purchase of materials incorporated into the unit.
Direct Payment Permit: If the Taxpayer finds that it is impossible to determine whether the purchased materials will be used for retail sales or real property construction transactions, the Taxpayer may apply to the department for a direct payment permit which would allow the Taxpayer to pay any tax directly to the state and avoid the collection of tax by suppliers. See VR 630-10-34.
Interstate Commerce Exemption: The sales and use tax will not apply to retail sales made in interstate commerce; for example, when the units are sold without installation and delivered by the Taxpayer directly to the purchaser outside of Virginia and no use of the property is made within Virginia (see VR 630-10-51 for examples of other types of exempt interstate commerce transactions). In such instances, it will be the responsibility of the purchaser to pay the other state's sales or use tax, unless such other state requires the Taxpayer to register with it for the collection of its sales or use taxes. Accordingly, the Taxpayer may want to contact the other states in which it plans to do business concerning their sales and use tax registration requirements.
Industrial Production Exemptions: To qualify for the industrial production exemptions, the Taxpayer must be principally or primarily fabricating tangible personal property for sale or resale. As it appears from the information provided that the Taxpayer will be principally or primarily fabricating tangible personal property for its own use or consumption in real property contracts, the Taxpayer is not entitled, at this time, to any of the industrial production exemptions set out in VR 630-10-63.
To determine whether it will be entitled to the industrial production exemptions for subsequent years, the Taxpayer should annually compare the dollar volume of modular units sold with and without installation at the same time each year. If the annual sales comparison establishes that the Taxpayer is primarily producing these units for sale without installation (i.e., primarily a manufacturer), it will be entitled to the industrial production exemptions on a one-year prospective basis.
If reclassified as primarily a manufacturer, the Taxpayer must pay the tax on the "fabricated cost price" of any units installed by the Taxpayer, rather than pay the tax on the cost price of raw materials. See subsection E of VR 630-10-27 which defines fabricated cost price. Otherwise, if the annual review shows that the Taxpayer is primarily selling and installing these structures (i.e., primarily a contractor), then the Taxpayer will not be entitled to the production exemptions and should continue to pay the tax on the cost price of raw materials and production equipment.
Leased Sites: There may be some instances when a unit and the site are not owned by the same person. For example, the owner of the unit may lease the site and be required to remove the unit at the termination of the site lease. In such a situation, the installation of the modular unit could possibly be classified as personalty for Virginia retail sales and use tax purposes, provided the conditions of the lease clearly specify that the lessee is to remove the structure at, or sometime before, the expiration of the lease and the lease term is for less than 80% of the expected life of the structure. In order for the Taxpayer to treat this type of transaction as a retail sale of tangible personal property when the Taxpayer has agreed to perform any part of the installation process, the Taxpayer must obtain and retain a copy of the customer's lease agreement. Absent such proof from its customer, the Taxpayer will be deemed a real property contractor liable for the Virginia sales and use tax in accordance with VR 630--10-27.
Situs of Sale: VR 630-10-84(A) provides the following:
-
- For determining the place of business in Virginia from which a sale is made, "place of business" means the business location in Virginia that first takes the purchaser's order, either in person, by purchase order or by letter or telephone, regardless of the location of the merchandise or the point of acceptance of the order or shipment. For example, an order placed for merchandise in a store in County A, forwarded by the store in County A to a sales office in City B and shipped to the purchaser from a warehouse or branch store in County C is a sale made in County A.
As the Taxpayer has only one place of business which is located in Virginia, the situs of each sale is at such place of business. Accordingly, the locality in which the Taxpayer's place of business is physically located is the locality for which the local 1 % sales tax will apply.
If you have any questions concerning this response, please contact *** of my Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9883R
Rulings of the Tax Commissioner