Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling or refining; Fabrication of plumbing fixtures, pipes and fittings
Topic
Taxability of Persons and Transactions
Date Issued
02-23-1998
February 23, 1998
Dear**********:
This will reply to your letter of February 3, 1998, in which you request a ruling regarding the application of the retail sales and use tax to certain contractual arrangements involving your client, ***** (the ``Taxpayer').
FACTS
The Taxpayer is a distributor and fabricator of plumbing supplies. The Taxpayer intends to construct, equip, and operate a distribution and fabrication facility (the ``facility') in Virginia.
In constructing the facility, the Taxpayer plans to enter into an agreement with the local Industrial Development Authority (the ``IDA'). The IDA will acquire the land where the facility will be built. Before construction of the facility begins, the Taxpayer will purchase the land from the IDA at cost.
In constructing the facility, the Taxpayer will contract with the IDA to, in essence, serve as a general contractor involved in the construction. The Taxpayer will also engage various professional construction and equipment firms (the ``Prime Contractor') to perform (or cause subcontractors to perform), coordinate, and manage all services and other labor necessary to construct and equip the facility. The Prime Contractor will contract directly with subcontractors as necessary.
The Taxpayer will engage the IDA to be the only purchaser of all materials used in constructing the facility and all equipment installed in the facility. The IDA, Prime Contractor, subcontractors, and the Taxpayer will be bound to adhere to clearly delineated written purchase procedures.
Under these procedures, the IDA will designate both the Prime Contractor and the subcontractors as the IDA's official purchasing agents for the materials and equipment to be used in the construction and equipping of the facility. All purchases will be made pursuant to official IDA purchase orders on which the IDA's credit is bound. All invoices will be addressed to the IDA. In advance of invoice due dates for purchases, the IDA will obtain from the Prime Contractor the funds necessary to ensure that the IDA can pay the invoices as they come due. The Prime Contractor will pay funds solely to the IDA, and the IDA will then pay the invoices by separate checks.
RULING
Generally
Under Code of Virginia Sec. 58.1-610(A), contractors are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract and are liable for use tax on property furnished by the other party to their contracts, and on which no sales tax was previously paid. However, an exception to the general rule is set forth in subsection B of Code of Virginia Sec. 58.1-610 for property furnished to a contractor that would otherwise enjoy one of the governmental exemptions under Code of Virginia Sec. 58.1-609.1(4). Under this subsection, as clarified in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(J), contractors are not subject to the use tax when provided with tangible personal property purchased by a government entity for use in real property construction contracts.
Pursuant to Code of Virginia Sec. 15.2-4903, an IDA is a political subdivision of Virginia. Consequently, tangible personal property purchased for use or consumption by an IDA qualifies for exemption from the retail sales and use tax under Code of Virginia Sec. 58.1-609.1(4).
Tax Application to Contractual Arrangements
Based on the arrangements proposed above, the IDA would serve as the general contractor for the construction of the facility. Because the IDA is serving as the general contractor and is deemed the final user or consumer of all tangible personal property which it purchases in the performance of its real property contract with the Taxpayer, it may purchase the materials and equipment exempt of the sales tax pursuant to Code of Virginia Sec. 58.1-609.1(4), provided the purchases are made pursuant to official purchase orders to be paid out of public funds. Under Code of Virginia Sec. 58.1-610(B) and VAC 10-210-410(J), the Prime Contractor and subcontractors will not be liable for use tax on the materials purchased and furnished by the IDA. The application of the tax in this instance is consistent with previous rulings of the department. See Public Document (P.D.) 95-80 (4/12/95), copy enclosed.
Please note that purchases made by the Prime Contractor or by subcontractors, rather than by the IDA, in connection with the real property construction contracts will generally be subject to the tax. Only in instances where the credit of the IDA is bound directly and the Prime Contractor or subcontractor has been officially designated as the purchasing agent for the IDA will such purchases be deemed exempt of the tax.
In structuring a purchasing agent agreement to enable the Prime Contractor or subcontractors to purchase construction materials without subjecting either to the use tax, and to demonstrate to vendors that the transactions are sales to the government, it is necessary for the agreement to have, as a minimum, provisions for:
-Binding the credit of the IDA in all purchases made by the Prime Contractor or chosen subcontractor;
-Designating the Prime Contractor or chosen subcontractor as the purchasing agent on behalf of and in the name of the IDA for all purchases (e.g., machinery, equipment, and materials or only materials) made in connection with the construction and equipping of the facility;
-All purchases to be made by the Prime Contractor or chosen subcontractor via IDA contracts, exemption certificates, and purchase orders which note on their face that the Prime Contractor or chosen subcontractor is acting as purchasing agent and has not assumed any liability to the vendor and that the vendor should look to the IDA for payment of all obligations resulting from purchases by the Prime Contractor or chosen subcontractor;
-Payment of purchases to be made directly by the IDA from public funds;
-Providing exemption certificates, Form ST-12, which have been signed by an IDA representative authorized to sign them, to all suppliers or vendors of tangible personal property; and
-Title to all construction purchases by the Prime Contractor or chosen subcontractor acting as the IDA's purchasing agent rests solely with the IDA.
Industrial Manufacturing Exemption
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery, tools, and other items used directly in industrial manufacturing or processing of tangible personal property for sale or resale. Code of Virginia Sec. 58.1-602 provides that the term ``industrial in nature' includes all businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual.
A review of the SIC Manual reveals that businesses engaged in fabricating plumbing fixtures are classified in SIC Code 3432. Furthermore, businesses engaged in fabricating pipe and pipe fittings are classified in SIC Code 3498. Therefore, these activities are deemed to be industrial in nature, and the industrial manufacturing exemption set out in Code of Virginia Sec. 58.1-609.3(2) is applicable to the Taxpayer's purchases of industrial machinery and other items to be used directly and predominantly in these activities.
The Taxpayer must furnish a completed exemption certificate, Form ST-11 (copy enclosed) to its vendors or suppliers of manufacturing equipment. Other contractors or subcontractors who may be hired to furnish and install production machinery may qualify for exemption on their purchases, provided they have applied in writing to the department for an exemption certificate, Form ST-11A. The request for Form ST-11A must include a description of the project, the estimated completion date, the items to be purchased, the name of the manufacturer, and the manufacturer's street and mailing addresses. Such requests should be addressed to the department's Office of Customer Services, P. O. Box 1880, Richmond, Virginia 23218-1880. For purchases made by the IDA, the procedure outlined under the section ``Tax Application to Contractual Arrangements' should be followed.
IDA - General Contractor Role
The IDA's role as general contractor is crucial to its ability to furnish construction materials to the Prime Contractor and subcontractors exempt of the sales and use tax.If the IDA does not act as general contractor, but is responsible only for purchasing and furnishing the materials and equipment to the Prime Contractor or subcontractors, the exclusion under Code of Virginia Sec. 58.1-610(B) is not available to the contractors furnished materials by the IDA. In such instances, the IDA does not perform any services as a contractor and, therefore, cannot be considered the final user or consumer of the materials, machinery, or other items purchased. Consequently, the Taxpayer or the contractor to whom the property is furnished is liable for the use tax on such items (if tax is not paid at the time of purchase).
Ruling Advisory
The above rulings are limited to the application of the sales and use tax to the transactions described in your letter as summarized herein. It is not intended to address the authority of the IDA to engage in the activities described.
If you have any questions regarding this ruling, you may contact ***** of the department's Office of Tax Policy at *****.
Dear**********:
This will reply to your letter of February 3, 1998, in which you request a ruling regarding the application of the retail sales and use tax to certain contractual arrangements involving your client, ***** (the ``Taxpayer').
FACTS
The Taxpayer is a distributor and fabricator of plumbing supplies. The Taxpayer intends to construct, equip, and operate a distribution and fabrication facility (the ``facility') in Virginia.
In constructing the facility, the Taxpayer plans to enter into an agreement with the local Industrial Development Authority (the ``IDA'). The IDA will acquire the land where the facility will be built. Before construction of the facility begins, the Taxpayer will purchase the land from the IDA at cost.
In constructing the facility, the Taxpayer will contract with the IDA to, in essence, serve as a general contractor involved in the construction. The Taxpayer will also engage various professional construction and equipment firms (the ``Prime Contractor') to perform (or cause subcontractors to perform), coordinate, and manage all services and other labor necessary to construct and equip the facility. The Prime Contractor will contract directly with subcontractors as necessary.
The Taxpayer will engage the IDA to be the only purchaser of all materials used in constructing the facility and all equipment installed in the facility. The IDA, Prime Contractor, subcontractors, and the Taxpayer will be bound to adhere to clearly delineated written purchase procedures.
Under these procedures, the IDA will designate both the Prime Contractor and the subcontractors as the IDA's official purchasing agents for the materials and equipment to be used in the construction and equipping of the facility. All purchases will be made pursuant to official IDA purchase orders on which the IDA's credit is bound. All invoices will be addressed to the IDA. In advance of invoice due dates for purchases, the IDA will obtain from the Prime Contractor the funds necessary to ensure that the IDA can pay the invoices as they come due. The Prime Contractor will pay funds solely to the IDA, and the IDA will then pay the invoices by separate checks.
RULING
Generally
Under Code of Virginia Sec. 58.1-610(A), contractors are deemed to be the taxable users or consumers of any property used in connection with a real estate construction contract and are liable for use tax on property furnished by the other party to their contracts, and on which no sales tax was previously paid. However, an exception to the general rule is set forth in subsection B of Code of Virginia Sec. 58.1-610 for property furnished to a contractor that would otherwise enjoy one of the governmental exemptions under Code of Virginia Sec. 58.1-609.1(4). Under this subsection, as clarified in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(J), contractors are not subject to the use tax when provided with tangible personal property purchased by a government entity for use in real property construction contracts.
Pursuant to Code of Virginia Sec. 15.2-4903, an IDA is a political subdivision of Virginia. Consequently, tangible personal property purchased for use or consumption by an IDA qualifies for exemption from the retail sales and use tax under Code of Virginia Sec. 58.1-609.1(4).
Tax Application to Contractual Arrangements
Based on the arrangements proposed above, the IDA would serve as the general contractor for the construction of the facility. Because the IDA is serving as the general contractor and is deemed the final user or consumer of all tangible personal property which it purchases in the performance of its real property contract with the Taxpayer, it may purchase the materials and equipment exempt of the sales tax pursuant to Code of Virginia Sec. 58.1-609.1(4), provided the purchases are made pursuant to official purchase orders to be paid out of public funds. Under Code of Virginia Sec. 58.1-610(B) and VAC 10-210-410(J), the Prime Contractor and subcontractors will not be liable for use tax on the materials purchased and furnished by the IDA. The application of the tax in this instance is consistent with previous rulings of the department. See Public Document (P.D.) 95-80 (4/12/95), copy enclosed.
Please note that purchases made by the Prime Contractor or by subcontractors, rather than by the IDA, in connection with the real property construction contracts will generally be subject to the tax. Only in instances where the credit of the IDA is bound directly and the Prime Contractor or subcontractor has been officially designated as the purchasing agent for the IDA will such purchases be deemed exempt of the tax.
In structuring a purchasing agent agreement to enable the Prime Contractor or subcontractors to purchase construction materials without subjecting either to the use tax, and to demonstrate to vendors that the transactions are sales to the government, it is necessary for the agreement to have, as a minimum, provisions for:
-Binding the credit of the IDA in all purchases made by the Prime Contractor or chosen subcontractor;
-Designating the Prime Contractor or chosen subcontractor as the purchasing agent on behalf of and in the name of the IDA for all purchases (e.g., machinery, equipment, and materials or only materials) made in connection with the construction and equipping of the facility;
-All purchases to be made by the Prime Contractor or chosen subcontractor via IDA contracts, exemption certificates, and purchase orders which note on their face that the Prime Contractor or chosen subcontractor is acting as purchasing agent and has not assumed any liability to the vendor and that the vendor should look to the IDA for payment of all obligations resulting from purchases by the Prime Contractor or chosen subcontractor;
-Payment of purchases to be made directly by the IDA from public funds;
-Providing exemption certificates, Form ST-12, which have been signed by an IDA representative authorized to sign them, to all suppliers or vendors of tangible personal property; and
-Title to all construction purchases by the Prime Contractor or chosen subcontractor acting as the IDA's purchasing agent rests solely with the IDA.
Industrial Manufacturing Exemption
Code of Virginia Sec. 58.1-609.3(2) provides an exemption from the retail sales and use tax for machinery, tools, and other items used directly in industrial manufacturing or processing of tangible personal property for sale or resale. Code of Virginia Sec. 58.1-602 provides that the term ``industrial in nature' includes all businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual.
A review of the SIC Manual reveals that businesses engaged in fabricating plumbing fixtures are classified in SIC Code 3432. Furthermore, businesses engaged in fabricating pipe and pipe fittings are classified in SIC Code 3498. Therefore, these activities are deemed to be industrial in nature, and the industrial manufacturing exemption set out in Code of Virginia Sec. 58.1-609.3(2) is applicable to the Taxpayer's purchases of industrial machinery and other items to be used directly and predominantly in these activities.
The Taxpayer must furnish a completed exemption certificate, Form ST-11 (copy enclosed) to its vendors or suppliers of manufacturing equipment. Other contractors or subcontractors who may be hired to furnish and install production machinery may qualify for exemption on their purchases, provided they have applied in writing to the department for an exemption certificate, Form ST-11A. The request for Form ST-11A must include a description of the project, the estimated completion date, the items to be purchased, the name of the manufacturer, and the manufacturer's street and mailing addresses. Such requests should be addressed to the department's Office of Customer Services, P. O. Box 1880, Richmond, Virginia 23218-1880. For purchases made by the IDA, the procedure outlined under the section ``Tax Application to Contractual Arrangements' should be followed.
IDA - General Contractor Role
The IDA's role as general contractor is crucial to its ability to furnish construction materials to the Prime Contractor and subcontractors exempt of the sales and use tax.If the IDA does not act as general contractor, but is responsible only for purchasing and furnishing the materials and equipment to the Prime Contractor or subcontractors, the exclusion under Code of Virginia Sec. 58.1-610(B) is not available to the contractors furnished materials by the IDA. In such instances, the IDA does not perform any services as a contractor and, therefore, cannot be considered the final user or consumer of the materials, machinery, or other items purchased. Consequently, the Taxpayer or the contractor to whom the property is furnished is liable for the use tax on such items (if tax is not paid at the time of purchase).
Ruling Advisory
The above rulings are limited to the application of the sales and use tax to the transactions described in your letter as summarized herein. It is not intended to address the authority of the IDA to engage in the activities described.
If you have any questions regarding this ruling, you may contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner