Tax Type
Retail Sales and Use Tax
Description
Application of sales and use tax; Sale defined
Topic
Taxability of Persons and Transactions
Date Issued
10-17-1996
October 17, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear*************
This will reply to your letter of May 1, 1996, in which you seek a ruling on the application of sales and use tax to roofing warranties on behalf of ********** (the Taxpayer).
FACTS
The Taxpayer is a roofing contractor that includes a charge for an extended warranty in the contract price of each roofing job. The Taxpayer's supplier bills the Taxpayer for the warranty and charges sales tax on the invoice. The Taxpayer passes this charge on to its customers in the contract price of the roofing jobs. The terms of the warranty require that an inspector from the Taxpayer's supplier inspect each roofing job at its completion to insure that the job meets certain specifications. When the inspector approves the job, the supplier bills the Taxpayer for the warranty and includes a charge for sales tax computed on the price of the warranty. The Taxpayer bills its customers for the job and includes the warranty charge in the contract price of the job.
If one of the Taxpayer's customers requests warranty work, the Taxpayer purchases the necessary materials or withdraws the materials from inventory to make the covered warranty repairs. The Taxpayer pays applicable sales taxes on the materials at the time of purchase. When the warranty work is completed, the Taxpayer bills and receives reimbursement from the supplier for the material and labor costs incurred to perform the warranty repairs. The Taxpayer questions whether the supplier is correct in charging sales tax on the warranty invoices since it is paying the tax on the materials used to perform warranty repairs at the time of purchase.
DETERMINATION
Virginia Regulation (VR 630-10-27 (copy enclosed) defines a contractor as "... any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon, including highways, and in connection therewith to furnish tangible personal property ..." This section goes on to say that "[u]nless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts." Based on the above, contractors are generally considered the users or consumers of all tangible personal property purchased by them and must pay sales or use tax on all such purchases.
A September 27, 1995, tax bulletin issued by the department discusses the application of sales tax to parts and labor maintenance contracts and specifically addresses real property maintenance contracts. The bulletin states that "[p]ersons who provide maintenance to real property are deemed to be real property contractors as addressed in VR 630-10-27. Such contractors are the users or consumers of all property which becomes realty upon installation and must pay the tax on the cost price of such property." A copy of the above referenced bulletin is enclosed.
The information furnished by the Taxpayer indicates it pays sales tax on the materials used to make warranty repairs at the time of purchase. The Taxpayer also pays sales tax on the supplier's charges for the warranties. Code of Virginia § 58.1-602 (copy enclosed) defines "Sale" as "... any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise ... of tangible personal property ...
The warranty transactions are structured in such a manner that the supplier reimburses the Taxpayer for its warranty repair expenses after the work is completed. The Taxpayer is responsible for providing the tangible personal property needed to perform the work. The supplier's charge for the warranty does not provide for the transfer of tangible personal property from the supplier to the Taxpayer; it merely entitles the Taxpayer to receive reimbursement from the supplier for the cost of materials and labor used to make covered warranty repairs. Based on the above, a sale as defined in Code of Virginia § 58.1-602 has not taken place between the Taxpayer and the supplier.
The Taxpayer was correctly paying sales tax on the materials purchased to perform warranty repairs and should continue to pay the tax on all purchases of tangible personal property as required by law. The Taxpayer may seek a refund from its supplier for the sales tax paid on the warranty charges. The supplier may take a credit on their sales tax return for the sales tax refunded to the Taxpayer. You should note that this ruling is based on the facts and circumstances presented by the Taxpayer and any change in those facts and circumstances may alter this ruling.
If you have any questions concerning my determination, you may contact ****** in the Office of Tax Policy at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11199S
Rulings of the Tax Commissioner