Tax Type
Retail Sales and Use Tax
Description
Construction; Using and consuming contractor
Topic
Taxability of Persons and Transactions
Date Issued
02-06-1997
February 6, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear*********************
This will reply to your letter in which you request a ruling as to the application of the retail sales and use tax to your client (the "Taxpayer") and an out-of-state affiliated corporation (the "Affiliate") of the Taxpayer.
FACTS
The Taxpayer is a South Carolina corporation which maintains its commercial domicile and base of business in Virginia. The Taxpayer's business activities include the manufacture of tangible personal property for use in real property construction contracts. For sales and use tax purposes the Taxpayer is classified as a dual role fabricator under Virginia Regulation (VR) 630-10-27.E (copy enclosed), with its principal business activity being that of fabricating for its own use and consumption in the performance of real property contracts. On occasion, the Taxpayer will require additional materials to fulfill a contract. On these occasions, the Taxpayer will acquire materials from the Affiliate who is a dual role fabricator that conducts business in a state other than Virginia. The Affiliate's principal activity is fabricating tangible personal property for its own use and consumption in real property contracts. The Affiliate pays the sales tax on the raw material cost of tangible personal property used in fabrication in its state of domicile. The Affiliate does not have employees, a business location, sales representatives, or inventory in Virginia. The Taxpayer is requesting a ruling on the Virginia sales and use tax application for the following two scenarios.
Scenario I
The Taxpayer contracts to furnish and install tangible personal property tor a real property construction contract in Virginia. Rather than perform the fabrication and erection itself, the Taxpayer subcontracts with the Affiliate to furnish and install. The Affiliate furnishes materials and contracts with on unrelated third party for installation.
Scenario ll
Taxpayer contracts as a general contractor or subcontractor for the fabrication and installation of materials with respect to a real property construction contract in Virginia. Taxpayer contracts with Affiliate for provision of the fabricated materials. Affiliate delivers fabricated materials to the Virginia job site and Taxpayer performs erection.
The Taxpayer is requesting a ruling on the sales and use tax application to both the Taxpayer and the Affiliate in the above two situations.
RULING
VR 630-10-27.E addresses fabricators who operate in a dual role capacity of fabricating tangible personal property for sale or resale and fabricating for their own use in the performance of real property construction contracts. This regulation states that, any dual role fabricator who is principally fabricating tangible personal property for his own use and consumption in real property contracts is operating as a using and consuming contractor and must pay the tax on the cost price of the raw materials which make up such fabricated property. This regulation goes on to provide that should the contractor sell fabricated tangible personal property at retail, the tax is collected upon the retail selling price. The contractor is not entitled to a credit for tax paid to the supplier since the transactions are separate and distinct taxable transactions.
As provided in your letter, the Taxpayer and the Affiliate are both principally fabricating for their own use in real property construction contracts and are paying tax on the raw material cost price in their respective states. In Virginia, a subcontractor takes on the role of the using and consuming party to the contract and is liable for the tax on tangible personal property being installed. Keeping this in mind, I will address the Virginia sales and use tax application to Scenario I and ll separately below.
Scenario I
The Taxpayer has contracted with the Affiliate to furnish and install fabricated tangible personal property. This classifies the Affiliate as a using and consuming contractor with respect to real property construction and would subject the Affiliate to the tax on all fabricated materials going into the project. It is the policy of the department to allow an out-of-state contractor a credit against Virginia taxes for any taxes properly paid on property acquired in another state. As provided, the Affiliate has paid the sales tax on all raw materials in its state of domicile. Due to the fact the sales tax in the Affiliate's state of domicile is higher than the use tax rate in Virginia, I find that the Affiliate incurs no additional Virginia tax liability. It should be noted, however, if the Affiliate paid sales tax on material costs at a rate less than the 4 1/2% Virginia use tax rate, the Affiliate would be obligated to pay a complementary use tax to equal the 4 1/2% Virginia rate.
Scenario ll
The Taxpayer is acting as the general contractor or subcontractor responsible for furnishing and installing fabricated property in real property construction contracts. For reasons of convenience or economics, the Taxpayer contracts with Affiliate solely for the provision of fabricated tangible personal property to be delivered to the Virginia job site. The Taxpayer will perform all installation. In this case, the Taxpayer is acting as the using and consuming contractor and the Affiliate is doing nothing more than selling fabricated property to the Taxpayer.
As provided above, when a dual role fabricator sells fabricated property at retail, the tax is collected upon the retail selling price, with no credit available for tax paid to the supplier on raw material costs. In this Scenario, the Affiliate is making a retail sale to the Taxpayer. Due to the fact that the Affiliate does not have nexus in Virginia and is not required to collect the Virginia tax, the Taxpayer would be required to pay the 4 1/2% Virginia use tax since he is the using and consuming contractor with respect to the Virginia job.
If you should have any further questions, please contact ************* , Office of Tax Policy, at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11975K
Rulings of the Tax Commissioner