Tax Type
Retail Sales and Use Tax
Description
Interstate transactions; Credits
Topic
Taxability of Persons and Transactions
Date Issued
04-23-1998
April 23, 1998
Dear*************:
This will reply to your letter of July 15, 1997 and subsequent letter of August 22, 1997, in which you request a ruling as to the retail sales and use tax application to transactions engaged in by your client (the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a fabricator of products for its own use in real property contracts and for sale to other contractors. The Taxpayer requests a response to questions relative to its activities. The Taxpayer asks for clarification regarding (i) the primary purpose rule for contractors, (ii) interstate commerce and transactions taxable in Virginia, and (iii) the sale and installation of fabricated products.
RULING
Primary purpose rule: The Taxpayer seeks answers to questions regarding sales and use tax as it applies under Title 23 of the Virginia Administrative Code (VAC) 10-210-410 (formerly Virginia Regulation (VR) 630-10-27).
Question 1: The Taxpayer questions whether the department uses Virginia gross receipts generated from sales or gross receipts generated from all sales including sales to other states in determining if a taxpayer is primarily fabricating tangible personal property for its own use in real property contracts or for sale or resale.
The primary purpose rule will apply to all gross receipts regardless of whether they are from Virginia or non-Virginia sources. See enclosed Public Document (P.D.) 93-91 (3/29/93).
Question 2: Is the primary purpose test determined for receipts at each location in such a way that the taxpayer could be a dual capacity contractor at one location and a dual capacity retailer at the other location?
The primary purpose test is computed separately for each facility of a company located or doing business in Virginia. Therefore, depending on the results of the primary purpose test, a taxpayer could be deemed fabricating tangible personal property principally for sale or resale at one location and a using and consuming contractor at the other location. If the Taxpayer derives more than 50% of its gross receipts from retail sales at one location, the Taxpayer is deemed to be fabricating principally for sale or resale. If the Taxpayer derives more than 50% of its gross receipts from installed sales at another location, the Taxpayer is considered a using and consuming contractor. See enclosed P.D. 92-114 (6/29/92).
Question 3: If the Taxpayer reorganized into two divisions, one which fabricates tangible personal property for sale or resale and the other division which fabricates tangible personal property for the Taxpayer's own use and consumption in real property contracts, would gross receipts of both divisions be aggregated in applying the primary purpose test?
The gross receipts of both divisions are used in the primary purpose test provided that the divisions are located at the same plant site. However, a separate computation of the primary purpose test may be provided if separate production lines at the same plant site are engaged in substantially dissimilar production activities. If the divisions are located at separate plant sites, the primary purpose test will be determined for each plant location. See P.D. 92-114 (6/29/92).
Question 4: Are gross receipts measured from the date a person begins operating or during a specific period of time for purposes of applying the primary purpose test? Also, if one or more specific contracts shift the balance of gross receipts from a retailer to a contractor classification only for the duration of the contracts, is the primary purpose test applied on a contract by contract basis?
The primary purpose test is computed annually either on a fiscal or calendar year basis provided that the same basis is used consistently from year to year. The Taxpayer must compute on an annual basis the gross receipts attributable to sales versus use in construction contracts to determine the correct application of the tax, applying the results of the determination under the primary purpose test on a prospective basis, for each facility. See P.D. 92-114 (6/29/92).
Question 5: Are gross receipts measured on an accrual or cash basis of accounting?
The department measures gross receipts on an accrual basis.
Questions 6 and 7: If the Taxpayer is fabricating tangible personal property principally for sale or resale and can identify raw materials at the time of purchase needed for use in a specific contract, does the Taxpayer pay a use tax on the cost of the raw materials or Fabricated cost of the product used for installation? Assuming that the Taxpayer must pay tax to the supplier on the cost of the raw materials at the time of purchase, will the Taxpayer be liable for use tax on such materials at the time they are removed from inventory?
If the Taxpayer is able to determine at the time of purchase tangible personal property for its own use in real property construction, the Taxpayer must pay the tax to the supplier based on the cost price of the raw materials. However, if the Taxpayer maintains an exempt inventory for resale and withdraws tangible personal property for use in real estate construction contracts, the Taxpayer must pay the tax on the fabricated cost price. See P.D.'s 85-220 (12/11/85), 85-234 (12/11/85), and 94-96 (3/31/94).
Sale and delivery of property outside Virginia: The Taxpayer seeks answers to specific questions below regarding sales and use tax as it applies under 23 VAC 10210-780 (formerly VR 630-10-51).
Title 23 VAC 10-210-780 states in part that ``[T]he sales and use tax does not apply to sales of tangible personal property in interstate or foreign commerce.' However, the regulation provides that ``a sale in interstate commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.'
Question 1: Do the terms F.O.B. point of origin (Virginia) result in title and constructive possession passing to an out-of-state buyer in Virginia at the time and place the goods are delivered into a contract carrier's possession, thereby subjecting the sale to Virginia sales tax? Also, does title and constructive possession pass in Virginia to materials paid for by an out-of-state purchaser while the materials are stored in Virginia or is the focus upon physical possession and use of the property by the out-of-state purchaser upon actual delivery of the materials outside Virginia? If the focus is upon physical possession, is the material delivered outside Virginia by an independent trucker hired by the seller exempt under the interstate commerce exemption, regardless of the F.O.B. terms forpassage of title?
The buyer does not take constructive possession at the time and place the product is delivered to the common carrier provided that there are no instructions from the buyer to the seller at the time the order is completed, other than instructions indicating where to ship the property, and the property is shipped by the common carrier to a location out of this state. The department's policy regarding this issue is further addressed in the enclosed P.D.'s 87-51 (2/26/87) and 93-53 (3/5/93).
It is not necessary that the buyer take physical possession of the property in Virginia for the buyer to exercise constructive possession while the property is still within Virginia. The buyer, by its storage of the merchandise in Virginia prior to delivery outside Virginia, has made a taxable first use of the merchandise in Virginia. However, you are correct in indicating that sales of tangible personal property delivered outside Virginia by an independent trucker hired by the seller qualifies for the interstate commerce exemption, regardless of the F.O.B. terms for passage of title.
Question 2: If sales of fabncated product to out-of-state contractors are subject to Virginia sales and use tax, and such sales are also subject to Maryland sales tax, will Virginia grant a credit for any sales taxes paid to Maryland?
Title 23 VAC 10-210-450 states that ``[a]ny person who purchases tangible personal property in another state and who has paid a sales or use tax to such state . . . on the property, is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase.' This same section also states that ``[t]his credit does not apply to tax erroneously charged or incorrectly paid to the other state . . . but is limited to the amount of Virginia use tax imposed on the property.'
Based on the foregoing, if the out-of-state contractor purchases fabricated property from a Virginia supplier and takes possession of such property in Virginia for subsequent delivery to Maryland, the contractor has made first use of the property in Virginia. There is no credit available for taxes paid to other states when first use is made in Virginia. The out-of-state contractor must apply to the other state for any credit or refund.
Sale and installation of property in real property construction projects: The Taxpayer seeks answers to questions regarding sales and use tax as it applies under Title 23 VAC 10-210-410(E) (formerly VR 630-10-27(E)).
Question 1: When the Taxpayer contracts to install and incorporate fabricated product into real property and advance payment is made and the bill of sale is issued for the fabricated product before shipment and installation, is the Taxpayer acting as a retailer with a separate obligation for installation or is the Taxpayer acting as a using and consuming contractor?
When the fabricated product is installed by the Taxpayer as part of an overall contract, the Taxpayer is the user or consuming contractor and must pay the tax on the cost price of the raw materials which make up such fabricated property. The fact that the fabricated product may be installed at some later date has no bearing on the application of the tax.
Question 2: When the Taxpayer fabncates product for its own use in real property contracts outside Virginia, is the fabncated product subject to Virginia use tax based upon the fabncated cost of the property deemed withdrawn from inventory, the cost price of the raw matenals used to fabncate the product, or is the tax based upon the cost price of the property, prorated by the proportion of the duration of the use in Virginia compared to the total useful life of such property as provided in Code of Virginia Sec. 58.1-604?
Code of Virginia Sec. 58.1-604 imposes the use tax upon the ``use or consumption of tangible personal property in this Commonwealth.' The term ``use' is defined in Code of Virginia Sec. 58.1-602 as ``the exercise of any right or power over tangible personal property incident to the ownership thereof. . .' This position is supported by the opinion of the Virginia Supreme Court in Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E. 2d 413 (1980) which held that ``if a taxable event occurs in Virginia subsequent delivery of property outside this State does not immunize the taxable event.'
When the Taxpayer contracts to furnish and install tangible personal property with respect to real property, it is deemed a using and consuming contractor and is subject to the tax in accordance with 23 VAC 10-210-410(E). Any person who is principally fabricating tangible personal property for his own use and consumption in real property construction contracts must pay the tax on the cost of the raw materials which make up the fabricated product. However, any person who is principally fabricating tangible personal property for sale or resale must collect and remit the tax based upon the fabricated cost price of the tangible personal property.
Proration of the fabricated product would not apply in this instance because it is the property not purchased ``for use' in Virginia, but subsequently used in Virginia that is contemplated within the proration language in Code of Virginia Sec. 58.1-604. See P.D. 91-294 (11/19/91).
Question 3: The Taxpayer has questions regarding the application of the tax to its fabricated product if it reorganized into two separate companies (A & B) that are owned by the same shareholders, such that Company A fabricates product for sale to customers and Company B fabricates product for use and consumption in real property construction.
The sales and use tax liability is limited to the cost of raw materials purchased by Company B that fabricates product for use and consumption in real property construction.
For answers to your question regarding whether the application of the tax to the fabricated product changes if (i) both Companies are owned by the same shareholders or (ii) the Taxpayer operated in a dual capacity before separating into Company A and B, see response to questions 2 and 3 under the ``Primary purpose rule' section.
I hope the foregoing has responded to your inquiry. I am enclosing copies of the cited statutes, regulations and Public Documents. If you have additional questions, you may contact ***** at *****.
Dear*************:
This will reply to your letter of July 15, 1997 and subsequent letter of August 22, 1997, in which you request a ruling as to the retail sales and use tax application to transactions engaged in by your client (the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a fabricator of products for its own use in real property contracts and for sale to other contractors. The Taxpayer requests a response to questions relative to its activities. The Taxpayer asks for clarification regarding (i) the primary purpose rule for contractors, (ii) interstate commerce and transactions taxable in Virginia, and (iii) the sale and installation of fabricated products.
RULING
Primary purpose rule: The Taxpayer seeks answers to questions regarding sales and use tax as it applies under Title 23 of the Virginia Administrative Code (VAC) 10-210-410 (formerly Virginia Regulation (VR) 630-10-27).
Question 1: The Taxpayer questions whether the department uses Virginia gross receipts generated from sales or gross receipts generated from all sales including sales to other states in determining if a taxpayer is primarily fabricating tangible personal property for its own use in real property contracts or for sale or resale.
The primary purpose rule will apply to all gross receipts regardless of whether they are from Virginia or non-Virginia sources. See enclosed Public Document (P.D.) 93-91 (3/29/93).
Question 2: Is the primary purpose test determined for receipts at each location in such a way that the taxpayer could be a dual capacity contractor at one location and a dual capacity retailer at the other location?
The primary purpose test is computed separately for each facility of a company located or doing business in Virginia. Therefore, depending on the results of the primary purpose test, a taxpayer could be deemed fabricating tangible personal property principally for sale or resale at one location and a using and consuming contractor at the other location. If the Taxpayer derives more than 50% of its gross receipts from retail sales at one location, the Taxpayer is deemed to be fabricating principally for sale or resale. If the Taxpayer derives more than 50% of its gross receipts from installed sales at another location, the Taxpayer is considered a using and consuming contractor. See enclosed P.D. 92-114 (6/29/92).
Question 3: If the Taxpayer reorganized into two divisions, one which fabricates tangible personal property for sale or resale and the other division which fabricates tangible personal property for the Taxpayer's own use and consumption in real property contracts, would gross receipts of both divisions be aggregated in applying the primary purpose test?
The gross receipts of both divisions are used in the primary purpose test provided that the divisions are located at the same plant site. However, a separate computation of the primary purpose test may be provided if separate production lines at the same plant site are engaged in substantially dissimilar production activities. If the divisions are located at separate plant sites, the primary purpose test will be determined for each plant location. See P.D. 92-114 (6/29/92).
Question 4: Are gross receipts measured from the date a person begins operating or during a specific period of time for purposes of applying the primary purpose test? Also, if one or more specific contracts shift the balance of gross receipts from a retailer to a contractor classification only for the duration of the contracts, is the primary purpose test applied on a contract by contract basis?
The primary purpose test is computed annually either on a fiscal or calendar year basis provided that the same basis is used consistently from year to year. The Taxpayer must compute on an annual basis the gross receipts attributable to sales versus use in construction contracts to determine the correct application of the tax, applying the results of the determination under the primary purpose test on a prospective basis, for each facility. See P.D. 92-114 (6/29/92).
Question 5: Are gross receipts measured on an accrual or cash basis of accounting?
The department measures gross receipts on an accrual basis.
Questions 6 and 7: If the Taxpayer is fabricating tangible personal property principally for sale or resale and can identify raw materials at the time of purchase needed for use in a specific contract, does the Taxpayer pay a use tax on the cost of the raw materials or Fabricated cost of the product used for installation? Assuming that the Taxpayer must pay tax to the supplier on the cost of the raw materials at the time of purchase, will the Taxpayer be liable for use tax on such materials at the time they are removed from inventory?
If the Taxpayer is able to determine at the time of purchase tangible personal property for its own use in real property construction, the Taxpayer must pay the tax to the supplier based on the cost price of the raw materials. However, if the Taxpayer maintains an exempt inventory for resale and withdraws tangible personal property for use in real estate construction contracts, the Taxpayer must pay the tax on the fabricated cost price. See P.D.'s 85-220 (12/11/85), 85-234 (12/11/85), and 94-96 (3/31/94).
Sale and delivery of property outside Virginia: The Taxpayer seeks answers to specific questions below regarding sales and use tax as it applies under 23 VAC 10210-780 (formerly VR 630-10-51).
Title 23 VAC 10-210-780 states in part that ``[T]he sales and use tax does not apply to sales of tangible personal property in interstate or foreign commerce.' However, the regulation provides that ``a sale in interstate commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.'
Question 1: Do the terms F.O.B. point of origin (Virginia) result in title and constructive possession passing to an out-of-state buyer in Virginia at the time and place the goods are delivered into a contract carrier's possession, thereby subjecting the sale to Virginia sales tax? Also, does title and constructive possession pass in Virginia to materials paid for by an out-of-state purchaser while the materials are stored in Virginia or is the focus upon physical possession and use of the property by the out-of-state purchaser upon actual delivery of the materials outside Virginia? If the focus is upon physical possession, is the material delivered outside Virginia by an independent trucker hired by the seller exempt under the interstate commerce exemption, regardless of the F.O.B. terms forpassage of title?
The buyer does not take constructive possession at the time and place the product is delivered to the common carrier provided that there are no instructions from the buyer to the seller at the time the order is completed, other than instructions indicating where to ship the property, and the property is shipped by the common carrier to a location out of this state. The department's policy regarding this issue is further addressed in the enclosed P.D.'s 87-51 (2/26/87) and 93-53 (3/5/93).
It is not necessary that the buyer take physical possession of the property in Virginia for the buyer to exercise constructive possession while the property is still within Virginia. The buyer, by its storage of the merchandise in Virginia prior to delivery outside Virginia, has made a taxable first use of the merchandise in Virginia. However, you are correct in indicating that sales of tangible personal property delivered outside Virginia by an independent trucker hired by the seller qualifies for the interstate commerce exemption, regardless of the F.O.B. terms for passage of title.
Question 2: If sales of fabncated product to out-of-state contractors are subject to Virginia sales and use tax, and such sales are also subject to Maryland sales tax, will Virginia grant a credit for any sales taxes paid to Maryland?
Title 23 VAC 10-210-450 states that ``[a]ny person who purchases tangible personal property in another state and who has paid a sales or use tax to such state . . . on the property, is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase.' This same section also states that ``[t]his credit does not apply to tax erroneously charged or incorrectly paid to the other state . . . but is limited to the amount of Virginia use tax imposed on the property.'
Based on the foregoing, if the out-of-state contractor purchases fabricated property from a Virginia supplier and takes possession of such property in Virginia for subsequent delivery to Maryland, the contractor has made first use of the property in Virginia. There is no credit available for taxes paid to other states when first use is made in Virginia. The out-of-state contractor must apply to the other state for any credit or refund.
Sale and installation of property in real property construction projects: The Taxpayer seeks answers to questions regarding sales and use tax as it applies under Title 23 VAC 10-210-410(E) (formerly VR 630-10-27(E)).
Question 1: When the Taxpayer contracts to install and incorporate fabricated product into real property and advance payment is made and the bill of sale is issued for the fabricated product before shipment and installation, is the Taxpayer acting as a retailer with a separate obligation for installation or is the Taxpayer acting as a using and consuming contractor?
When the fabricated product is installed by the Taxpayer as part of an overall contract, the Taxpayer is the user or consuming contractor and must pay the tax on the cost price of the raw materials which make up such fabricated property. The fact that the fabricated product may be installed at some later date has no bearing on the application of the tax.
Question 2: When the Taxpayer fabncates product for its own use in real property contracts outside Virginia, is the fabncated product subject to Virginia use tax based upon the fabncated cost of the property deemed withdrawn from inventory, the cost price of the raw matenals used to fabncate the product, or is the tax based upon the cost price of the property, prorated by the proportion of the duration of the use in Virginia compared to the total useful life of such property as provided in Code of Virginia Sec. 58.1-604?
Code of Virginia Sec. 58.1-604 imposes the use tax upon the ``use or consumption of tangible personal property in this Commonwealth.' The term ``use' is defined in Code of Virginia Sec. 58.1-602 as ``the exercise of any right or power over tangible personal property incident to the ownership thereof. . .' This position is supported by the opinion of the Virginia Supreme Court in Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E. 2d 413 (1980) which held that ``if a taxable event occurs in Virginia subsequent delivery of property outside this State does not immunize the taxable event.'
When the Taxpayer contracts to furnish and install tangible personal property with respect to real property, it is deemed a using and consuming contractor and is subject to the tax in accordance with 23 VAC 10-210-410(E). Any person who is principally fabricating tangible personal property for his own use and consumption in real property construction contracts must pay the tax on the cost of the raw materials which make up the fabricated product. However, any person who is principally fabricating tangible personal property for sale or resale must collect and remit the tax based upon the fabricated cost price of the tangible personal property.
Proration of the fabricated product would not apply in this instance because it is the property not purchased ``for use' in Virginia, but subsequently used in Virginia that is contemplated within the proration language in Code of Virginia Sec. 58.1-604. See P.D. 91-294 (11/19/91).
Question 3: The Taxpayer has questions regarding the application of the tax to its fabricated product if it reorganized into two separate companies (A & B) that are owned by the same shareholders, such that Company A fabricates product for sale to customers and Company B fabricates product for use and consumption in real property construction.
The sales and use tax liability is limited to the cost of raw materials purchased by Company B that fabricates product for use and consumption in real property construction.
For answers to your question regarding whether the application of the tax to the fabricated product changes if (i) both Companies are owned by the same shareholders or (ii) the Taxpayer operated in a dual capacity before separating into Company A and B, see response to questions 2 and 3 under the ``Primary purpose rule' section.
I hope the foregoing has responded to your inquiry. I am enclosing copies of the cited statutes, regulations and Public Documents. If you have additional questions, you may contact ***** at *****.
Rulings of the Tax Commissioner