Tax Type
Retail Sales and Use Tax
Description
Government transactions; Industrial development authority as contractor
Topic
Taxability of Persons and Transactions
Date Issued
05-21-1996
May 21, 1996
Re: Request for Ruling: Retail Sales and Use Tax
Dear****************
This is in response to your letter of May 16, 1996 in which you request a ruling regarding the application of the retail sales and use tax to certain contractual arrangements involving********(the Taxpayer).
FACTS
The Taxpayer is a national chain of retail discount stores. The Taxpayer intends to contract for the construction of, and operate, a state-of-the-art distribution facility (the facility) in Virginia. The facility will service the Taxpayer's stores throughout the northeastern United States and will utilize both truck and rail service.
In constructing the facility, the Taxpayer plans to contract with the local Industrial Development Authority (IDA), a political subdivision of Virginia, as general contractor, with the Taxpayer or a contracting third party serving as construction manager. All materials used in constructing the facility and all equipment installed in the facility would be purchased directly by and billed to the IDA pursuant to official IDA purchase orders using IDA funds. The IDA would furnish construction materials and equipment (racking, mechanization, and conveyor systems) to the subcontractors for use in construction and installation. The IDA would directly contract with subcontractors and suppliers to build and equip the facility. The IDA's credit, and not the Taxpayer's, would be bound in the performance of those contracts.
Under an agreement between the IDA and the Taxpayer, the IDA will acquire the land where the facility will be built. Before construction of the facility begins, the Taxpayer will purchase the land from IDA at cost. The Taxpayer will pay an administrative fee to IDA for acting as the general contractor and pay funds to the IDA as and when the IDA presents its draw requests. The IDA will pay the subcontractors and suppliers.
You maintain the IDA's purchase of materials and equipment for construction of and equipping the facility is exempt from Virginia sales and use tax based upon the exemption set out under Code of Virginia § 58.1-609.1(4) for political subdivisions of Virginia. You also maintain that the subcontractors are not subject to the use tax on the materials and equipment furnished to them by the IDA.
RULING
These same facts and issues were previously addressed in P.D. 95-80 (4/12/95), copy enclosed. Based on the applicable statutes, regulations and reasons cited in such ruling, the IDA may purchase the materials and equipment exempt of the sales and use 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. Pursuant to Code of Virginia § 58.1-610(B) and Virginia Regulation (VR) 630-10-27 (copy enclosed), the subcontractors will not be liable for use tax on the materials and equipment furnished by the IDA.
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.
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).
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, please contact ***** at ***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11226R
Rulings of the Tax Commissioner