Tax Type
Retail Sales and Use Tax
Description
Construction; Escalator manufacturer and installer.
Topic
Taxability of Persons and Transactions
Date Issued
04-13-1998
April 13, 1998
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********:
In your letter of February 27, 1998, you seek correction of the retail sales and use tax assessment issued to ********** (the Taxpayer) as a result of an audit.
FACTS
The Taxpayer is a manufacturer of escalators and on occasion installs them for customers. An audit for the period February 1995 through December 1997 resulted in an assessment of use tax on untaxed purchases of tangible personal property used or consumed in the Taxpayer's operations.
The Taxpayer takes exception to the use tax assessed on the fabricated cost price of escalators withdrawn from inventory and installed in a***** location. The Taxpayer maintains that the sale and installation of the escalators constituted an exempt sale in interstate commerce as title passed to the escalators in *****. The Taxpayer indicates that it has paid the sales and use tax on these items to the state of ***** .
DETERMINATION
The Taxpayer relies upon Code of Virginia § 58.1-609.10(4) which provides an exemption from the sales and use tax for sales of tangible personal property when title or possession to the property being sold passes to the purchaser outside Virginia, delivery of the property is directly to the purchaser outside Virginia, and no use or consumption of the property occurs within Virginia.
In this case, the Taxpayer furnished and installed escalators, which upon installation, became a part of the realty. In such instances, Code of Virginia § 58.1-610(A) sets out the following statutory provision:
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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.
When a business operates in the dual capacity of fabricating items for sale or resale and fabricating items for its own use or consumption in the performance of real property construction contracts, Title 23 of the Virginia Administrative Code (VAC) 10-210-410(E) provides that such businesses "shall follow a primary purpose rule based on gross receipts in determining sales and use tax application." It is my understanding that the Taxpayer principally fabricates escalators for sale or resale. Accordingly, this regulation requires that the tax apply to the fabricated cost price of items withdrawn from inventory for use or consumption in the performance of real property construction contracts. This regulation sets out that "[fjabricated cost price is computable by totaling the cost of materials, labor, and overhead charged to work in process. Freight inward at the plant is treated as an element of the cost of materials."
Based on the above cited statutory and regulatory provisions, it is clear that the Taxpayer acted in the capacity of a real property construction or installation contractor in regard to the escalators at issue. Accordingly, the Taxpayer is considered to be the final user or consumer of these escalators.
Furthermore, the Virginia Supreme Court has ruled in Department of Taxation v. Miller-Morton Company [220 Va. 852, 263 S.E.2d 413 (1980)] that "[i]f a taxable event occurs in Virginia, subsequent delivery of the property outside this State does not immunize the taxable event." When the escalators were removed from an exempt inventory in Virginia, they lost any exempt "for resale" status, as they were removed for use in real property construction or installation services. In removing the escalators from inventory, the Taxpayer exercised its right or power over the property. In other words, the Taxpayer made a taxable use of the escalators in Virginia before they were subsequently transported to New York for installation.
The Taxpayer also does not qualify for the exemption set out under Code of Virginia § 58.1-609.3(1) which exempts from the sales and use tax purchases of construction materials, temporarily stored in Virginia, by a contractor which are to be used solely outside Virginia in an exempt construction project. As provided by 23 VAC10-210-410(1), the exemption is restricted to construction materials that are to be incorporated into exempt real property construction and could be purchased tax free by the contractor in the other state. Based on the information submitted, it does not appear that these escalators qualify for an exemption from ****sales or use tax.
Based on all of the foregoing, the assessment of use tax on the escalators is proper as issued. If the Taxpayer has not already submitted payment of the assessment, bill ********should be paid in full within the next 30 days to avoid further interest charges.
If you have any questions about this determination, please contact *******of my tax policy staff at *** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13715R
Rulings of the Tax Commissioner