Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Dual capacity fabricator
Topic
Taxability of Persons and Transactions
Date Issued
06-30-1997
June 30, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter in which you seek correction of an assessment issued to*******(the "Taxpayer"), for the period October 1994 through March 1996. I apologize for the delay in responding to you.
FACTS
The Taxpayer manufactures modular homes for its own use in performing real estate construction contracts. The Taxpayer also sells modular homes on an uninstalled basis to contractors for use in real estate construction jobs. The Taxpayer treats itself as a using and consuming contractor on all the modular homes it manufactures and pays use tax on the cost of the raw materials used to manufacture the modular homes. An audit of the Taxpayer revealed that it was treating retail sales of the modular homes as if the Taxpayer was the user and consumer of the tangible personal property. The Taxpayer was paying use tax on the raw materials incorporated into the modular homes that were sold at retail. The department's auditor assessed use tax on the difference between the sales price of the modular homes and the cost of the raw materials on which use tax was paid.
DETERMINATION
The Taxpayer maintains that the assessment ignores the primary purpose rule set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(E) which states that "[a] manufacturer, processor or miner who operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for his own use and consumption in the performance of real property construction contracts shall follow a primary purpose rule based on gross receipts in determining sales and use tax application."
The third paragraph of Title 23 VAC 10-210-410(E) states that "[a]ny person who is principally fabricating tangible personal property for his own use and consumption in real property construction contracts shall apply the tax according to subsection D above. In addition, persons who sell tangible personal property to consumers must register, collect, and pay the tax on the retail selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible personal property which can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to his supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions." (Emphasis added).
The Taxpayer is primarily fabricating modular homes for its own use and consumption; therefore, subsection D would apply to the Taxpayer's use and consumption of property in the performance of real property construction jobs. Subsection E of the regulation clearly indicates that the Taxpayer's retail sales of modular homes to consumers are subject to the tax on the retail selling price. This distinction between property used and consumed by a fabricator and property sold by a fabricator does not invalidate the primary purpose rule. The primary purpose rule is used to determine the proper method for paying use tax on property used and consumed by manufacturers or fabricators who are also contractors.
While I am sympathetic with the Taxpayer's situation, the auditor's assessment was proper. Due to the length of time taken to respond to the Taxpayer, I will waive the accrual of additional interest on the assessment if it is paid within sixty days. The department's records indicate a current balance of ********* . If you have any questions concerning this matter, please contact ******* in the Office of Tax Policy at*********. Your payment may be mailed to ********at P.O. Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11540S
Rulings of the Tax Commissioner