Tax Type
Retail Sales and Use Tax
Description
Construction; Multiple purchases of personal property used in construction.
Topic
Taxability of Persons and Transactions
Date Issued
11-21-1997
November 21, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This is in response to your letter of July 22, 1997, seeking correction of portions of a sales and use tax assessment issued to********* (the "Taxpayer") for the period July 1993 to June 1996.
FACTS
The Taxpayer is a residential developer and homebuilder. An assessment was issued to the Taxpayer for untaxed purchases of tangible personal property installed or used at a number of the Taxpayer's Virginia developments. All of the contested transactions involve personal property provided by contractors or vendors who installed or delivered the property to the development sites.
The Taxpayer contests the assessment with respect to landscaping services, installation of silt fences, welding work on steel support beams/columns, exterior railings and sales office displays. Each of the issues raised by the Taxpayer will be addressed separately as follows:
DETERMINATION
Landscape Management Services
The portions of the audit pertaining to the purchase of plantings and shrubbery are not contested by the Taxpayer. However, the Taxpayer disagrees with other portions of the audit dealing with landscape maintenance services including seeding, grass cutting and applying chemicals.
The application of use tax to these types of transactions is addressed in Title 23 of the Virginia Administrative Code (VAC) 10-210-610. Subsection C provides that:
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- Any landscaper, nurseryman, or contractor who goes beyond the sale and planting of shrubbery, sod, etc. and contracts to grade, seed and fertilize lawns or to provide periodic fertilizing or weed killing treatments is deemed to be a consumer of all tangible personal property used in performing such service and must pay the tax on such property at the time of purchase. The charge to the customer for providing the service is not subject to the tax.
The foregoing regulation appears to apply squarely to the situation presented in your letter. To the extent that the landscaping contractor is performing grounds maintenance services in which it applies the types of items listed in the regulation, the landscaping contractor, as opposed to its customer, is deemed the consumer of the products used and thus responsible for the sales or use tax on these items. Therefore, the assessments relating to landscape maintenance "purchases" will be removed from the audit.
Silt Fence
Silt fences and related materials are provided by three contractors at various Taxpayer development sites during the period of the audit. The Taxpayer maintains that the tax should not have been assessed on these transactions because the installing contractors paid the tax on the silt fence materials at the time of purchase.
The department addressed the sale of silt fencing in P.D. 96-201. A copy of this determination is attached for your reference. Silt fencing is often installed by a landscaping and grading contractor as part of an of an overall landscaping and erosion control contract. In other instances, the silt fence is sold outside of a landscaping and grading job. In this latter instance, the silt fence seller is deemed to be a retailer of the silt fence materials and the tax applies to this type of transaction. This situation describes the transactions subject to assessment in this case. The sales of the silt fencing were outside of a landscaping and grading contract. Accordingly, the assessment of the tax on the sale of these items is correct.
Railings
Iron railings are installed along exterior steps at the homes within the Taxpayer's developments. The railings were furnished and installed by a contractor on behalf of the Taxpayer. The Taxpayer asserts that the audit incorrectly assesses sales tax for the railings when the installing contractor was responsible for paying the tax.
The facts indicate that the vendor of the iron railings fabricates the railings from iron stock and permanently attaches them at the new houses where they are required. Once attached, the railings are transformed from tangible personal property to a part of the realty. This type of installation work is addressed by Code of Virginia § 58.1-610 which provides:
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- Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption.
The foregoing code provision applies in the case of the railing vendor so as to make the vendor responsible as a consuming contractor for paying sales tax on the cost price of the railing materials which are to be incorporated into real estate on behalf of the Taxpayer. Therefore, the portions of the audit assessing the Taxpayer with use tax on the railing installations will be removed.
Welding for Beams and Columns
The Taxpayer disagrees with the assessment of tax on the labor charges for welding together steel beams and columns utilized within the housing construction. The welding contractor performs the welding work only and does not supply the steel beams and columns that are welded together. 23 VAC 10-210-560 provides that:
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- An operation which changes the form or state of tangible personal property is fabrication . . . The tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish, either directly or indirectly, the materials used in the fabrication work. . . (Emphasis added)
The department has traditionally held that tangible personal property which is cut, sawed, shaped, bent, threaded, welded, bored, drilled, punched, machined, sheared, or otherwise subjected to an operation which changes the property's form or state is considered to have been "fabricated". See P.D. 90-14, copy enclosed. Such operations are deemed to represent a taxable service in accordance with the above regulation, notwithstanding that the materials used in the work are not furnished by the fabricator. For example, the Commissioner ruled in P.D. 86-242, copy enclosed, that a Taxpayer was performing a fabrication operation when it merely cut or shaped lumber brought in by its customer. The Taxpayer in that case had argued that it was performing an exempt service.
The foregoing examples illustrate the Department's longstanding policy based on the regulations and the Code of Virginia that fabrication labor is taxable without regard to whether the purchaser supplies the materials to be fabricated. Based on the foregoing, I find that the welding at issue here represents a change in the form or state of tangible personal property within the meaning of the regulation and therefore constitutes fabrication. Under the statute and applicable regulation the Taxpayer should have paid sales tax on these fabrication labor charges. Accordingly, the assessment of the tax on these welding labor charges is correct.
Sales Office Displays
This item pertains to the purchase of display cabinets installed in the Taxpayer's sales office by a cabinet contractor. According to the Taxpayer's letter, the contractor that supplied the cabinets only performs custom cabinet and display work. Further, it is indicated that the contractor has no retail or wholesale place of business.
Code of Virginia § 58.1-610(D) provides an exception to the general contractor rule and states that:
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- Any person selling fences, Venetian blinds, window shades, awnings, storm windows and doors, locks and locking devices, floor coverings (as distinguished from the floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items, shall be deemed to be a retailer of such items and not 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. (Emphasis added).
For purposes of the exception to the general contractor rule, a retailer is defined in 23 VAC 10-210-410(G) as "[a]ny person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items." The regulation goes on to provide that businesses that are not classified as retailers within the foregoing definition are deemed to be contractors who must pay the tax on installation items at the time of purchase and prior to incorporation into the realty.
The facts indicate that the cabinet contractor does not have a retail or wholesale place of business. Thus, the cabinet contractor would not be deemed a retailer under the forgoing code provision. Under 23 VAC 10-210-410 D, the fabricating and installing cabinet contractor is responsible for paying tax as the end user or consumer on the cost price of the materials incorporated into the cabinets. Therefore the assessment for use tax on the purchase of display cabinets for the sales office will be removed.
Based on the information provided in the Taxpayer's letter, the assessment for use tax relating to the purchases of landscape maintenance services, railing installations, and sales office display will be removed from the audit. If the Taxpayer can provide further documentation as to the scope of the work performed by the silt fence contractors so as to show that the installation was part of a larger erosion control contract rather than the mere installation of fence fabric and stakes, this portion of the audit will be removed as well. The ****District Office will be contacting the Taxpayer within 30 days so that the necessary revisions can be made. After the revisions are completed, a corrected Notice of Assessment will be issued, which will be immediately due and payable.
If you have any questions regarding this letter, please contact ****in my Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12782D
Rulings of the Tax Commissioner