Tax Type
Retail Sales and Use Tax
Description
Modular home installation by contractor; "Cost price"
Topic
Collection of Delinquent Tax
Date Issued
10-20-1998
October 20, 1998
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in response to your letter submitted on behalf of ***** (the Taxpayer) for correction of sales and use tax assessments issued as a result of an audit. Copies of all cited references are enclosed.
FACTS
The Taxpayer contracts with customers to furnish and install single-family modular homes. The Taxpayer buys modular sections or units prefabricated by a manufacturer and delivered to the Taxpayer in Virginia. The Taxpayer subcontracts out the installation work, such as setting and affixing the modular units on a permanent foundation at a residential site, connecting the units together to form a finished structure, completing finish work, and making utility connections.
An audit for the period December 1994 through November 1997 resulted in the assessment of Virginia's 4.5% consumer use tax on the wholly or partially untaxed cost price of modular homes purchased by the Taxpayer, including various other untaxed purchases of tangible personal property used or consumed in its operations. However, the Taxpayer takes exception to the entire assessment and maintains that its modular home transactions are real property transfers not subject to the retail sales and use tax.
Alternatively, the Taxpayer maintains that a modular home should not be taxed on 100% of its sales price. The Taxpayer maintains that the taxable sales price should not include costs for design, labor, set-up, profit, freight, transfer fees, and engineering and administrative expenses whether incurred at the manufacturer or dealer levels. The Taxpayer claims that there is a nontaxable component that must be recognized by the department, whether it is 30% or 60% of the sales price, or something in between.
The Taxpayer maintains that it is a contractor respecting real estate within the purview of Title 23 of the Virginia Administrative Code (VAC) 10-210-410. Within this context, the Taxpayer claims that it is engaged as a fabricator who fabricates tangible personal property exclusively for use and consumption in real property construction contracts. The Taxpayer believes that this designation would allow the Taxpayer to pay the retail sales or use tax on the cost price of raw materials which make up the modular homes.
However, at a recent meeting between the Taxpayer and the department's tax policy staff, it is my understanding that the Taxpayer claims that it only acts in the capacity of a retailer of modular homes since installation is handled by independent contractors.
DETERMINATION
Modular home sections purchased by Taxpayer
The provisions of 23 VAC 10-210-2080 set out the proper application of the tax to prefabricated house sections. For example, retail sales of prefabricated housing sections are taxable based on the sales price. If anyone contracts to furnish and install such sections, the contractor provisions of 23 VAC 10-210-410 apply.
Retail sales. When the Taxpayer sells modular home sections to a final purchaser without any installation service element, the transaction is for the taxable retail sale of tangible personal property. In such instances, the Taxpayer would be acting as a retail dealer required to register to charge and collect the sales tax on the gross sales price for remittance to the department. However, from the information presented, this type of situation does not appear to apply to the Taxpayer for the period of audit.
Contractor sales. When the Taxpayer contracts, or in any fashion agrees, to furnish and install a modular home, the Taxpayer is deemed to be a real property contractor for sales and use tax purposes pursuant to Code of Virginia § 58.1-610(A). The Taxpayer is the final user or consumer of the modular home, regardless of whether the Taxpayer installs the home or hires a subcontractor to perform all installation tasks. As the final user or consumer, the Taxpayer is liable for the sales and use tax based on the total cost price of modular units, i.e., the gross sales price charged by the manufacturer. The Taxpayer is also liable for the sales or use tax on the cost price of materials which it purchases in connection with real property construction contracts. From the information received, it is apparent that the Taxpayer is engaged as a real property contractor with regard to the modular homes at issue.
A modular home sold at retail in Virginia is subject to the 4.5% retail sales and use tax based on 100% of its gross sales price. Therefore, the Taxpayer is liable for the sales or use tax based on gross sales price of the modular home as charged by the manufacturer of such modular units.
The Taxpayer maintains that it should be defined as a fabricator who fabricates exclusively for use or consumption in real property contracts and, therefore, guided by the rule set out by 23 VAC 10-210-410(D). Although such fabricators generally pay the tax on the cost price of the "raw materials' which make up the fabricated property, this rule does not allow, nor is it intended to allow, the Taxpayer to pay the tax based only on the value or actual cost of the materials to the manufacturer for fabricating the modular home units sold to the Taxpayer. Rather, the modular home units sold by manufacturers to the Taxpayer constitute retail sales of finished products, notwithstanding that additional work is required by the Taxpayer or its subcontractors to install these units on location.
Gross sales price or cost price
The Taxpayer must pay the sales or use tax based on the gross sales price or cost price charged for these units by the modular manufacturer. Code of Virginia § 58.1-602 defines the term "sales price' to mean:
If no sales tax is charged by the vendor at the time of a taxable purchase or insufficient sales tax is charged on a taxable transaction, the Taxpayer becomes liable to report and-pay the use tax imposed by Code of Virginia § 58.1-604 on the untaxed cost price of the tangible personal property purchased. Code of Virginia § 58.1-602 defines the term "cost price' to mean:
In addition, I would note that the only allowable exemptions or exclusions from taxable sales price are those specifically set out by Code of Virginia § 58.1-609.5. However, there is clearly no basis in the retail sales and use tax law for exempting, deducting, or excluding expenses for overhead, profit, fabrication labor, and other costs (except those set out by Code of Virginia § 58.1-609.5) in connection with the retail sale or purchase of tangible personal property.
Manufacturing Exemption
The Taxpayer is considered a real property contractor when it contracts to sell and install modular homes. Therefore, it is not entitled to any of the production exemptions as noted in 23 VAC 10-210-410(F). This is because the Taxpayer exclusively engages in real property contracts. To be entitled to the production exemptions, the Taxpayer would need to be principally or primarily fabricating tangible personal property for sale at retail or resale (i.e., making sales primarily without installation) and satisfy the minimum criteria of an industrial manufacturer as set out by 23 VAC 10-210-920. However, the Taxpayer is not manufacturing modular units for sale at retail or resale and, therefore, is not entitled to the production exemptions.
Improper collection of the sales tax
It is my understanding that the Taxpayer has been notifying customers that additional sales tax is due on their purchases of modular homes. However, as the Taxpayer contracted to furnish and install these modular homes, the transactions between the Taxpayer and its customers are for real property installation. No sales or use tax should be charged to the customer. Rather, the Taxpayer must take the tax into consideration when bidding or settling on a contract amount. The Taxpayer remains solely liable for the use tax on the cost price of the modular home and other tangible personal property incorporated into the realty. As such, the Taxpayer bears the ultimate liability for the use tax assessed in connection with these homes.
Under these circumstances, Code of Virginia § 58.1-625 requires the Taxpayer to transmit to the Tax Commissioner such erroneously or illegally collected sales tax unless or until the Taxpayer can affirmatively show that the sales tax has since been refunded to the purchaser or credited to his account. As the Taxpayer has erroneously collected the sales tax on real property construction transactions, the Taxpayer should refund to its customers all of the collected sales tax within the next 60 days. When such refunds are completed, the Taxpayer must notify ***** (Audit Supervisor at the department's ***** District Office) at ***** so that he can arrange a time for an auditor to verify these customer tax refunds.
Alternatively, the Taxpayer may remit such improper sales tax collections to the department's ***** District Office, along with the names and addresses of all customers involved and the amount of the sales tax erroneously collected from each customer. However, these improper sales tax collections cannot be applied to or used as payment for the consumer use tax assessments at issue.
Conclusion
Based on all of the foregoing, I find no basis in which to revise the assessments at issue. Accordingly, the assessments are correct as issued. I note that one of the assessments has not been paid ***** therefore, the Taxpayer will soon receive an updated notice of assessment under separate cover. To preclude further interest charges, ***** should be paid in full within the next 45 days.
If you have any questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13489R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in response to your letter submitted on behalf of ***** (the Taxpayer) for correction of sales and use tax assessments issued as a result of an audit. Copies of all cited references are enclosed.
FACTS
The Taxpayer contracts with customers to furnish and install single-family modular homes. The Taxpayer buys modular sections or units prefabricated by a manufacturer and delivered to the Taxpayer in Virginia. The Taxpayer subcontracts out the installation work, such as setting and affixing the modular units on a permanent foundation at a residential site, connecting the units together to form a finished structure, completing finish work, and making utility connections.
An audit for the period December 1994 through November 1997 resulted in the assessment of Virginia's 4.5% consumer use tax on the wholly or partially untaxed cost price of modular homes purchased by the Taxpayer, including various other untaxed purchases of tangible personal property used or consumed in its operations. However, the Taxpayer takes exception to the entire assessment and maintains that its modular home transactions are real property transfers not subject to the retail sales and use tax.
Alternatively, the Taxpayer maintains that a modular home should not be taxed on 100% of its sales price. The Taxpayer maintains that the taxable sales price should not include costs for design, labor, set-up, profit, freight, transfer fees, and engineering and administrative expenses whether incurred at the manufacturer or dealer levels. The Taxpayer claims that there is a nontaxable component that must be recognized by the department, whether it is 30% or 60% of the sales price, or something in between.
The Taxpayer maintains that it is a contractor respecting real estate within the purview of Title 23 of the Virginia Administrative Code (VAC) 10-210-410. Within this context, the Taxpayer claims that it is engaged as a fabricator who fabricates tangible personal property exclusively for use and consumption in real property construction contracts. The Taxpayer believes that this designation would allow the Taxpayer to pay the retail sales or use tax on the cost price of raw materials which make up the modular homes.
However, at a recent meeting between the Taxpayer and the department's tax policy staff, it is my understanding that the Taxpayer claims that it only acts in the capacity of a retailer of modular homes since installation is handled by independent contractors.
DETERMINATION
Modular home sections purchased by Taxpayer
The provisions of 23 VAC 10-210-2080 set out the proper application of the tax to prefabricated house sections. For example, retail sales of prefabricated housing sections are taxable based on the sales price. If anyone contracts to furnish and install such sections, the contractor provisions of 23 VAC 10-210-410 apply.
Retail sales. When the Taxpayer sells modular home sections to a final purchaser without any installation service element, the transaction is for the taxable retail sale of tangible personal property. In such instances, the Taxpayer would be acting as a retail dealer required to register to charge and collect the sales tax on the gross sales price for remittance to the department. However, from the information presented, this type of situation does not appear to apply to the Taxpayer for the period of audit.
Contractor sales. When the Taxpayer contracts, or in any fashion agrees, to furnish and install a modular home, the Taxpayer is deemed to be a real property contractor for sales and use tax purposes pursuant to Code of Virginia § 58.1-610(A). The Taxpayer is the final user or consumer of the modular home, regardless of whether the Taxpayer installs the home or hires a subcontractor to perform all installation tasks. As the final user or consumer, the Taxpayer is liable for the sales and use tax based on the total cost price of modular units, i.e., the gross sales price charged by the manufacturer. The Taxpayer is also liable for the sales or use tax on the cost price of materials which it purchases in connection with real property construction contracts. From the information received, it is apparent that the Taxpayer is engaged as a real property contractor with regard to the modular homes at issue.
A modular home sold at retail in Virginia is subject to the 4.5% retail sales and use tax based on 100% of its gross sales price. Therefore, the Taxpayer is liable for the sales or use tax based on gross sales price of the modular home as charged by the manufacturer of such modular units.
The Taxpayer maintains that it should be defined as a fabricator who fabricates exclusively for use or consumption in real property contracts and, therefore, guided by the rule set out by 23 VAC 10-210-410(D). Although such fabricators generally pay the tax on the cost price of the "raw materials' which make up the fabricated property, this rule does not allow, nor is it intended to allow, the Taxpayer to pay the tax based only on the value or actual cost of the materials to the manufacturer for fabricating the modular home units sold to the Taxpayer. Rather, the modular home units sold by manufacturers to the Taxpayer constitute retail sales of finished products, notwithstanding that additional work is required by the Taxpayer or its subcontractors to install these units on location.
Gross sales price or cost price
The Taxpayer must pay the sales or use tax based on the gross sales price or cost price charged for these units by the modular manufacturer. Code of Virginia § 58.1-602 defines the term "sales price' to mean:
-
- ... the total amount for which tangible personal property or services are sold, including any services that are a part of the sale,... and includes any amount for which credit is given to the purchaser,... without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.
- ... the total amount for which tangible personal property or services are sold, including any services that are a part of the sale,... and includes any amount for which credit is given to the purchaser,... without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.
If no sales tax is charged by the vendor at the time of a taxable purchase or insufficient sales tax is charged on a taxable transaction, the Taxpayer becomes liable to report and-pay the use tax imposed by Code of Virginia § 58.1-604 on the untaxed cost price of the tangible personal property purchased. Code of Virginia § 58.1-602 defines the term "cost price' to mean:
-
- ... the actual cost of an item or article of tangible personal property computed in the same manner as the sales price as defined in this section without any deduction therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever. [Emphasis added.
- ... the actual cost of an item or article of tangible personal property computed in the same manner as the sales price as defined in this section without any deduction therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever. [Emphasis added.
In addition, I would note that the only allowable exemptions or exclusions from taxable sales price are those specifically set out by Code of Virginia § 58.1-609.5. However, there is clearly no basis in the retail sales and use tax law for exempting, deducting, or excluding expenses for overhead, profit, fabrication labor, and other costs (except those set out by Code of Virginia § 58.1-609.5) in connection with the retail sale or purchase of tangible personal property.
Manufacturing Exemption
The Taxpayer is considered a real property contractor when it contracts to sell and install modular homes. Therefore, it is not entitled to any of the production exemptions as noted in 23 VAC 10-210-410(F). This is because the Taxpayer exclusively engages in real property contracts. To be entitled to the production exemptions, the Taxpayer would need to be principally or primarily fabricating tangible personal property for sale at retail or resale (i.e., making sales primarily without installation) and satisfy the minimum criteria of an industrial manufacturer as set out by 23 VAC 10-210-920. However, the Taxpayer is not manufacturing modular units for sale at retail or resale and, therefore, is not entitled to the production exemptions.
Improper collection of the sales tax
It is my understanding that the Taxpayer has been notifying customers that additional sales tax is due on their purchases of modular homes. However, as the Taxpayer contracted to furnish and install these modular homes, the transactions between the Taxpayer and its customers are for real property installation. No sales or use tax should be charged to the customer. Rather, the Taxpayer must take the tax into consideration when bidding or settling on a contract amount. The Taxpayer remains solely liable for the use tax on the cost price of the modular home and other tangible personal property incorporated into the realty. As such, the Taxpayer bears the ultimate liability for the use tax assessed in connection with these homes.
Under these circumstances, Code of Virginia § 58.1-625 requires the Taxpayer to transmit to the Tax Commissioner such erroneously or illegally collected sales tax unless or until the Taxpayer can affirmatively show that the sales tax has since been refunded to the purchaser or credited to his account. As the Taxpayer has erroneously collected the sales tax on real property construction transactions, the Taxpayer should refund to its customers all of the collected sales tax within the next 60 days. When such refunds are completed, the Taxpayer must notify ***** (Audit Supervisor at the department's ***** District Office) at ***** so that he can arrange a time for an auditor to verify these customer tax refunds.
Alternatively, the Taxpayer may remit such improper sales tax collections to the department's ***** District Office, along with the names and addresses of all customers involved and the amount of the sales tax erroneously collected from each customer. However, these improper sales tax collections cannot be applied to or used as payment for the consumer use tax assessments at issue.
Conclusion
Based on all of the foregoing, I find no basis in which to revise the assessments at issue. Accordingly, the assessments are correct as issued. I note that one of the assessments has not been paid ***** therefore, the Taxpayer will soon receive an updated notice of assessment under separate cover. To preclude further interest charges, ***** should be paid in full within the next 45 days.
If you have any questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13489R
Rulings of the Tax Commissioner