Tax Type
Retail Sales and Use Tax
Description
Construction; Gate systems installer classified as contractor
Topic
Taxability of Persons and Transactions
Date Issued
07-30-1997
July 30, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ******* (the "Taxpayer") for the period January 1993 through February 1996. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer installs custom fabricated electronic vehicular gate systems for condominiums and private residences. Each set of gates is fabricated by a subcontractor who is licensed as a contractor.
An audit by the department revealed that the subcontractors were paying sales tax on materials used to fabricate the gates, as they considered the gate systems to be real property installed by a contractor. The auditor determined that the Taxpayer was selling tangible personal property, relying on Code of Virginia § 58.1-610(D), and assessed tax on the fabricated cost price of the gates, less separately stated installation charges.
The Taxpayer believes the gate systems should be considered real property and should not be taxed as the sale of tangible personal property. In addition, the Taxpayer states it has paid the department more tax than is due under the auditor's approach and, therefore, the assessment should be abated.
DETERMINATION
Code of Virginia § 58.1-610(A) sets forth the general rule that contractors are taxable on their purchases of tangible personal property for use or consumption in real property construction. The contractor or subcontractor performing the installation work does not collect the sales tax from his customer but instead pays the tax on his purchases of materials used in the installation work.
Code of Virginia § 58.1-610(D) sets forth an exception to the general rule. This subsection provides that:
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- A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences ... or other like or comparable items is not classified as a using or consuming contractor with respect to them, whether he sells to and installs such items for contractors or other customers and whether or not such retailer fabricates such items.
An interpretation of this provision is found in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(G). For purposes of the exception found in Code of Virginia § 58.1-610(D), a retailer is defined as:
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- any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items [fences] and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as a part of or incidental to the sale.
The key issue in this case is whether the Taxpayer is a retailer or whether it was proper for the Taxpayer to treat itself as a contractor. According to the regulation section cited above, the requirements of a retailer are that the Taxpayer maintain a place of business, an inventory, and perform installation as part of or incidental to the sale. It is clear from the facts that the Taxpayer maintains a place of business and performs installation, but it is questionable as to whether the Taxpayer maintains an inventory as defined under 23 VAC 10-210-410(G).
An inventory may consist of finished gates or component parts used to fabricate the gates. The test used to determine if there are sufficient component parts to constitute an inventory is whether the Taxpayer maintains most of the parts necessary to fabricate the finished product.
Based on the facts presented, the Taxpayer did not maintain most of the parts necessary to fabricate a finished gate. Thus, for purposes of the regulation cited above, the Taxpayer is not a retailer, and should be classified as a contractor.
The remaining issues you present are factual in nature and must be reviewed by the auditor. Therefore, I am referring the audit back to the auditor to review the information submitted and make adjustments consistent with this determination. I understand that the Taxpayer has paid a portion of the assessment. After the auditor has completed his review of the audit, a revised bill will be sent to the Taxpayer or a refund will be issued, whichever is appropriate.
Please keep in mind that the Taxpayer should follow the general rule of Code of Virginia § 58.1-610(A) and pay the tax on all purchases of tangible personal property used in connection with the installation of gates, as described in your letter. If there is a change in the manner in which the Taxpayer's business is conducted, the Taxpayer should seek a ruling from the department regarding the proper application of the tax.
If you have any further questions regarding the audit, please contact**********, Audit Supervisor, ******District Office, at***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11515F
Rulings of the Tax Commissioner