Tax Type
Retail Sales and Use Tax
Description
Contractor purchases; Out-of-state exempt contract; Penalty
Topic
Collection of Delinquent Tax
Exemptions
Penalties and Interest
Property Subject to Tax
Date Issued
03-31-1999
March 31, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear********************
This is in response to your letter seeking correction of a retail sales and use assessment on behalf of ******** (the Taxpayer). I apologize for the delay in responding to your letter. Copies of cited Virginia sources are enclosed.
FACTS
The Taxpayer is a retailer of handicap equipment and a contractor installing elevators. An audit for the period August 1994 through July 1997 resulted in an assessment of use tax on untaxed purchases of office supplies, commercial elevators, and installation materials and supplies for such elevators. All elevators and related installation materials and supplies are delivered to the Taxpayer's Virginia warehouse where they are stored prior to shipment to construction sites in Virginia and other states.
The Taxpayer takes exception to the tax assessed on purchases of commercial elevators installed in locations outside Virginia. The Taxpayer maintains that elevators installed outside Virginia are exempt from Virginia sales and use tax as sales in interstate commerce. The Taxpayer also maintains that elevators installed in Maryland and the District of Columbia by the Taxpayer may qualify for specific exemptions in Maryland and the District. Taxpayer claims double taxation as Virginia has assessed tax on elevators subject to taxation in other jurisdictions and, therefore, requests a credit for the taxes paid to the District of Columbia and Maryland.
DETERMINATION
First Use in Virginia
Title 23 of the Virginia Administrative Code (VAC) 10-210-6030(A) provides that "the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased.' This regulation establishes the principle that the use tax is a moment of transaction tax, i.e., tax liability is incurred at the moment of first use in Virginia.
Code of Virginia § 58.1-604 imposes the use tax "upon the use or consumption of tangible personal property in this Commonwealth. "Use' is defined in Code of Virginia § 58.1-602 as "the exercise of any right or power over tangible personal property incident to the ownership thereof.' Therefore, upon taking possession of the elevators and installation materials and supplies thereof within Virginia, and exercising dominion and control over them in Virginia, the Taxpayer made a taxable use of such items within Virginia, notwithstanding their subsequent shipment out of state.
Storage' is defined in Code of Virginia § 58.1-602 as " any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than sale at retail in the regular course of business.' (Emphasis added). This taxable storage concept is also set out in Code of Virginia § 58.1-603, which imposes the sales tax upon"tangible personal property stored in this Commonwealth for use or consumption in this Commonwealth.' Thus, even when the Taxpayer intends to deliver elevators and its installation components to other locations outside Virginia, this does not preclude the imposition of the sales and use tax on such property, when it is held in Virginia prior to delivery outside Virginia for use in real property construction projects.
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 taxable the storage of tangible personal property in Virginia even though the property would ultimately be shipped outside of the state. The tax liability is incurred by the Taxpayer at the moment the property is brought into Virginia and stored for use by the Taxpayer. Further, the Court held that"if a taxable event occurs in Virginia, subsequent delivery outside this State does not immunize the taxable event.'
Interstate Commerce Exemption
The exemption under Code of Virginia § 58.1-609.10(4) for the "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth' applies to the act of delivery, not the holding of goods in Virginia for delivery outside Virginia. In this case, the exemption is inapplicable because the first use of the items at issue occurred in Virginia. Further, no exemption is available because the interstate commerce exemption was designed"to avoid the possible constitutional problems involved in taxing interstate sales.'1 As the Taxpayer is the user or consumer of the elevators and installation materials and supplies, no sale in interstate commerce takes place.
Subsection A of 23 VAC 10-210-780 provides that "[a] sale in interstate or foreign commerce occurs only when title or possession of the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia. (Emphasis added). Thus, the interstate commerce exemption is only intended to exempt the"first use' of such property when such use occurs outside of Virginia. This is supported by subsection B of the same regulation which states that:
-
- The tax applies to the first use in Virginia of tangible personal property purchased elsewhere in a transaction which would have been taxed had the transaction occurred in Virginia, regardless of the fact that such property may have been, or may be used in interstate commerce.... Any tax due because of first use in Virginia may be subject to credit for like taxes paid elsewhere. (Emphasis added).
Accordingly, whenever tangible personal property is first used in Virginia, it becomes subject to the Virginia retail sales and use tax.
- The tax applies to the first use in Virginia of tangible personal property purchased elsewhere in a transaction which would have been taxed had the transaction occurred in Virginia, regardless of the fact that such property may have been, or may be used in interstate commerce.... Any tax due because of first use in Virginia may be subject to credit for like taxes paid elsewhere. (Emphasis added).
Within the context of 23 VAC 10-210-780(B), the credit for like taxes paid elsewhere is intended only to apply to taxes owed in the state from which the property was purchased, if legitimately imposed because of a taxable use made in the vendor's state prior to the delivery of the property to the Taxpayer in Virginia. In this regard, I would note that the out-of-state tax credit provisions of 23 VAC 10-210-450 provide that:
-
- Any person who purchases tangible personal property in another state and who has paid a sales or use tax to such state or its political subdivision or both 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 credit does not apply to tax erroneously charged or incorrectly paid to another state. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available. The purchaser must apply to the out-of-state seller for refund. (Emphasis added).
- Any person who purchases tangible personal property in another state and who has paid a sales or use tax to such state or its political subdivision or both 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 credit does not apply to tax erroneously charged or incorrectly paid to another state. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available. The purchaser must apply to the out-of-state seller for refund. (Emphasis added).
However, the taxation of the property by Virginia does not prevent other states from imposing their taxes when the property is used in such other states. Generally, other states allow a credit against their sales or use tax for taxes paid elsewhere when goods are imported into their states by contractors for use in real property contracts. The District of Columbia and Maryland have such provisions.2
It is also important to note that Virginia sales and use tax law treats every contractor as the user or consumer of all tangible personal property furnished to or by the contractor in connection with real property construction, reconstruction, installation, repair, and similar contracts. See Code of Virginia § 58.1-610 and 23 VAC 10-210-410. Any sale, distribution, or lease to or storage for such a contractor is deemed a sale, distribution, or lease to or storage for the ultimate consumer (i.e., the contractor), and not for resale by the contractor. No sale to a contractor is exempt on the grounds that the other party to the contract is a federal or state government agency, a federally chartered credit union, a public service corporation, a nonprofit school, college, or other ***** institution of learning, a nonprofit hospital, or a nonprofit church. Consequently, the Taxpayer is considered the final user of the items at issue.
Based on all of the foregoing, it is established that first use of the items at issue was made in Virginia prior to their shipment to locations outside Virginia. Furthermore, the interstate commerce exemption and the out-of-state tax credit for taxes paid to other states are not applicable. Accordingly, I must conclude that the items at issue are subject to the Virginia retail sales and use tax and are taxable if no other exemption or exclusion applies.
Exempt Construction Projects in the District of Columbia and Maryland
District of Columbia. The District of Columbia exempts from its sales and use tax a contractor's purchases of materials and supplies which are permanently affixed to real property under a construction contract with a semipublic institution, or with the federal or District governments or instrumentalities of those governments. For purposes of the sales and use tax imposed by the District, the term"semipublic institutions' means any corporation, community chest, fund or foundation, organized exclusively for religious, scientific, charitable or educational purposes. It also includes hospitals.3
Based on the foregoing, the exemption granted by Code of Virginia § 58.1-609.3(1) would apply to a contractor's purchases of construction materials which are installed in exempt real property construction projects with the federal government, the District government, and semi-public institutions, provided all of the exempt construction sites are located within the jurisdictional boundaries of the District.
There is evidence in the audit report that the Taxpayer failed to provide sufficient documentation (e.g., sales invoices, contracts or similar proof showing exact location of construction site; proof that a semipublic institution qualified for exemption under the District's sales and use tax laws; etc.) to support the removal of these type of items from the audit. Accordingly, in order to remove the items at issue from the audit, the department will need to verify that such materials were affixed to real property sites within the District and that such sites are owned by the federal government, the District government, instrumentalities of the federal or District governments, or semipublic institutions holding a valid exemption certificate issued by the District.
Maryland. Maryland permits contractors to purchase materials exempt of its tax when the materials are used to construct, improve, alter, or repair the real property of private, nonprofit charitable, educational, and religious organizations; volunteer fire companies; ambulance and rescue squads; and nonprofit cemeteries, all of which must be located in Maryland and have been issued an exemption certificate by Maryland. The materials must be incorporated into the real property to qualify for exemption. However, no exemption applies to materials that will be incorporated into the real property of any other organization (e.g., state or federal government agencies), whether or not such organization is exempt from tax for any reason.4
Accordingly, to the extent that the Taxpayer is able to furnish sufficient documentation (i.e., sales invoice or contract,5 exemption certificate issued by Maryland to the exempt organization,6 etc.) to the department, the audit will be revised to remove the items which the department is able to verify as incorporated into exempt real property construction projects in Maryland.
Penalty
On this second audit, the Taxpayer's use tax compliance ratio was less than one percent. On second audits, it is the department's long standing policy that the application of penalty is mandatory unless the use tax compliance ratio meets or exceeds 60% for use tax, or there is evidence of exceptional mitigating circumstances causing the tax deficiency. In this case, the Taxpayer has not demonstrated a sufficient level of tax compliance nor has it presented any evidence of exceptional mitigating circumstances.
Accordingly, I find no basis to waive the penalty assessed in this case. However, the compliance ratio will be recomputed when the audit is revised. Penalty will only be waived if the recomputed compliance ratio meets or exceeds the above cited compliance threshold for this second audit.
Conclusion
An auditor from the department's ***** District Office will be contacting you shortly to arrange for the review of the requested documentation relating to the claimed exempt construction projects. If the requested information is found acceptable, the audit will be revised and a revised bill will be sent to the Taxpayer.
If you have any questions about this response, please contact ***** at *****. If you have questions about the status of the revision, please contact *****, Audit Supervisor at the ***** District Office, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/15926R
1Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980).
2Pursuant to D.C. Code Ann., Title 9 Section 47-441, the District of Columbia allows a credit for taxes paid to other jurisdictions when the buyer is liable for the use tax to the District and has paid sales or use taxes on the same property to another state and its subdivisions. Maryland grants a credit against its sales or use tax for sales tax paid to another state on the cost of materials brought into Maryland. However, as Virginia's sales and use tax rate is lower than the sales and use tax rates of the District and Maryland, the Taxpayer would still be liable to the District and Maryland on the difference, i.e., 1.25 % for the District (5.75 % - 4.5 %) and 0.5 % for Maryland (5 % - 4.5 %). Accordingly, this demonstrates that there is no double taxation, such as requiring the Taxpayer to pay tax of 4.5 % to Virginia and 5 % to Maryland or 5.75 % to the District on the same property.
3D.C. Code Ann. §47-2001(r); D.C. Code Ann. §47-2201(j).
4Md. Regs. Code 03.06.01.19(D) & (E); Md. Regs. Code 03.06.01.22(C)(2)(b).
5Sales invoices and contracts should establish the location of the construction site and the name of the claimed exempt organization which the Taxpayer has contracted with.
6Maryland issues exemption certificates to the type of organizations listed above and allows contractors to use such organization's exemption certificate to purchase construction materials exempt of Maryland sales and use tax. Such exemption certificate should serve as proof that the organization is exempted under Maryland law and therefore serve as proof that the Taxpayer could have purchased the materials at issue in Maryland tax-free.
Sincerely,
Danny Payne
Tax Commissioner
Rulings of the Tax Commissioner