Tax Type
Retail Sales and Use Tax
Description
Petroleum equipment sales and installation; Real property contractor
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
08-25-2000
August 25, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek the correction of an assessment issued to ***** (the "Taxpayer") for the period September 1996 through September 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a special trade contractor that sells, installs, and services petroleum equipment. The Taxpayer operated as a retailer during the audit period. The department assessed use tax on the Taxpayer's purchases of tangible personal property used to install fuel tanks, fueling islands, canopies, and spill containment basins under contracts with government agencies of the Commonwealth of Virginia and the federal government. The department determined that the tangible personal property became real property upon installation and treated the Taxpayer as the taxable consumer of the property purchased. The Taxpayer maintains that the petroleum equipment does not become real property when installed; therefore, the sale and installation of the equipment is a retail sale. Because retail sales to Virginia and federal government entities are exempt from sales and use tax, the Taxpayer suggests that the assessment is erroneous and should be abated.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-410(A), copy enclosed, defines a contractor as:
In determining whether an article of tangible personal property becomes real or personal property upon installation, the intention of the party with respect to the item in question is the paramount consideration. The Virginia Supreme Court, in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), has ruled:
Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered...
In accordance with the Virginia Supreme Court's decision, the department places great emphasis on the intention of the parties making the annexation in determining whether the annexed property qualifies as tangible personal property or real property. The department has previously ruled in Public Documents 93-23 (2/9/93) and 91-141 (7/31/91) that petroleum equipment such as underground tanks, piping, valves, meters, and canopies become real property upon installation.
Based on the above, the Taxpayer is a real property contractor, not a retailer, with respect to the sale and installation of petroleum equipment. This is also true when the Taxpayer repairs and services this equipment. Title 23 VAC 10-210-410(J) states:
purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their own use or consumption and contractors are subject to the tax on such transactions.
The Taxpayer should note that the sales and use tax exemption for the United
States, the Commonwealth of Virginia, or its political subdivisions applies to retail sales made directly to the governments for their own use or consumption. This exemption does not apply to sales made to real property contractors even though title to the property passes to the government because contractors are deemed the users or consumers of all purchases used in the performance of real property contracts. If the Taxpayer sells petroleum equipment on an uninstalled basis to a qualifying government entity, the transaction qualifies as a retail sale and is exempt from sales and use tax.
In summary, the assessment is correct. The Taxpayer is required to pay the sales tax to its suppliers on purchases of petroleum equipment and installation materials that become real property when installed in Virginia. If the supplier does not charge sales tax, the Taxpayer should pay Virginia use tax.
Due to the delay in responding to your appeal, I will agree to waive the accrual of additional interest on the balance of the assessment if payment of $**** is received within ninety days. If payment is not received within this time, an updated notice of assessment that reflects additional accrued interest will be sent to you. Payment may be mailed to ***** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions concerning this determination, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24003S
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek the correction of an assessment issued to ***** (the "Taxpayer") for the period September 1996 through September 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a special trade contractor that sells, installs, and services petroleum equipment. The Taxpayer operated as a retailer during the audit period. The department assessed use tax on the Taxpayer's purchases of tangible personal property used to install fuel tanks, fueling islands, canopies, and spill containment basins under contracts with government agencies of the Commonwealth of Virginia and the federal government. The department determined that the tangible personal property became real property upon installation and treated the Taxpayer as the taxable consumer of the property purchased. The Taxpayer maintains that the petroleum equipment does not become real property when installed; therefore, the sale and installation of the equipment is a retail sale. Because retail sales to Virginia and federal government entities are exempt from sales and use tax, the Taxpayer suggests that the assessment is erroneous and should be abated.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-410(A), copy enclosed, defines a contractor as:
- any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon, including highways, and in connection therewith to furnish tangible personal property, whether such person be a prime contractor or subcontractor.
In determining whether an article of tangible personal property becomes real or personal property upon installation, the intention of the party with respect to the item in question is the paramount consideration. The Virginia Supreme Court, in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), has ruled:
Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered...
In accordance with the Virginia Supreme Court's decision, the department places great emphasis on the intention of the parties making the annexation in determining whether the annexed property qualifies as tangible personal property or real property. The department has previously ruled in Public Documents 93-23 (2/9/93) and 91-141 (7/31/91) that petroleum equipment such as underground tanks, piping, valves, meters, and canopies become real property upon installation.
Based on the above, the Taxpayer is a real property contractor, not a retailer, with respect to the sale and installation of petroleum equipment. This is also true when the Taxpayer repairs and services this equipment. Title 23 VAC 10-210-410(J) states:
purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their own use or consumption and contractors are subject to the tax on such transactions.
The Taxpayer should note that the sales and use tax exemption for the United
States, the Commonwealth of Virginia, or its political subdivisions applies to retail sales made directly to the governments for their own use or consumption. This exemption does not apply to sales made to real property contractors even though title to the property passes to the government because contractors are deemed the users or consumers of all purchases used in the performance of real property contracts. If the Taxpayer sells petroleum equipment on an uninstalled basis to a qualifying government entity, the transaction qualifies as a retail sale and is exempt from sales and use tax.
In summary, the assessment is correct. The Taxpayer is required to pay the sales tax to its suppliers on purchases of petroleum equipment and installation materials that become real property when installed in Virginia. If the supplier does not charge sales tax, the Taxpayer should pay Virginia use tax.
Due to the delay in responding to your appeal, I will agree to waive the accrual of additional interest on the balance of the assessment if payment of $**** is received within ninety days. If payment is not received within this time, an updated notice of assessment that reflects additional accrued interest will be sent to you. Payment may be mailed to ***** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions concerning this determination, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24003S
Rulings of the Tax Commissioner