Tax Type
Retail Sales and Use Tax
Description
Real property vs. personal property installations
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-26-2000
April 26, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer") as a result of an audit. I apologize for the delay in responding to your letter.
The Taxpayer is engaged in the construction and repair of service stations and in installing and repairing service station fuel dispensers. An audit for the period May 1992 through January 1998 resulted in an assessment of use tax on untaxed purchases and sales tax on untaxed sales, maintenance agreements, and rentals of tangible personal property. The assessment also includes unremitted sales tax.
The Taxpayer takes exception to part of the assessment and maintains that it should be treated as a real estate contractor in regard to the integrated fuel delivery systems that it acquires and installs at gas stations. Although it separately stated sales tax on its invoices, the Taxpayer maintains that it operated only as a real property contractor and did not collect any sales tax from its customers. The Taxpayer also takes exception to the sales tax assessed on maintenance agreements, and maintains that the allocation of the tax used in the audit between the real and tangible portions of the agreements is unfair. Alternatively, the Taxpayer requests a refund of the sales tax paid on tangible items furnished in connection with gas station maintenance contracts.
The Taxpayer does not contest the purchases portion of the assessment, nor does it contest the equipment rentals held in the audit.
Real property versus personal property installations
The distinctions made between real and tangible personal property have been addressed by the Virginia Supreme Court in Danville Holding Corp. v. Clement, 178 Va. 223 (1941) and confirmed in later cases, such as Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970). In Danville Holding, the Court set out three primary factors for determining whether property used in connection with realty is a fixture: "(1) Annexation of the chattel to the realty, actual or constructive; (2) Its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) The intention of the owner of the chattel to make it a permanent addition to the freehold."
The Court in Danville Holding stated that "adaptation of the chattel to the use of the property to which it is annexed is entitled to great weight, especially in connection with the element of intention. If the chattel is essential to the purposes for which the building is used or occupied, it will be considered a fixture, although its connection with the realty is such that it may be severed without injury to either." Although essentiality of purpose and annexation to the realty are important considerations, the Court further stated that "the intention of the party making the annexation is the paramount and controlling consideration."
Integrated Fuel Delivery System. The integrated fuel delivery systems consist of underground storage tanks, underground liquid and vapor lines, fuel delivery lines, electrical wiring, plumbing lines, concrete islands and pads, fuel dispensers (i.e., fuel pumps), and consoles (i.e., the master controls which house a computer to control gasoline flow from the dispenser, record the grade of gasoline selected, calculate the volume dispensed, compute the price of the gasoline, and enable and disable the dispensers). Component parts of these systems include the dispenser island enclosure/pedestal, dispensing hoses and nozzles, valves, meters, fuel filters, and credit card readers and printers specially designed and constructed to be housed within the dispenser island pedestal/enclosure.
The information presented shows that the integrated fuel delivery system is joined to the realty, suitable and essential to the use or purpose to which that part of the realty is used, and as you indicate, intended by the owner to become a permanent addition. Accordingly, the integrated fuel delivery systems, and the individual components of such systems, are deemed to be real property fixtures for retail sales and use tax purposes. This determination is consistent with the determinations made in Public Documents (P.D.) 87-131 (4/21/87), 91-141 (7/31/91) and 93-23 (2/9/93).
When the Taxpayer sells and installs integrated fuel delivery systems or component parts of such systems, the transaction is for real property construction or installation services, the charge for which is not taxable. In such instances, the Taxpayer is liable for the sales or use tax based on the cost price of the component parts of such systems.
However, when the Taxpayer sells such systems or component parts of such, without installation at retail, it must charge and collect the sales tax based on the sales price charged the customer.
Cash register and office printer. By their very nature and purpose, I find that it would be difficult to consider these items as fixtures to the realty. These items are freestanding and serve a facilitative role rather than an essential and indispensable role in the operation of the integrated fuel delivery system. In P.D. 99-106 (5/6/99), copy enclosed, I would note that the department did not disagree with the taxpayer's classification of a cash register as tangible personal property even though connected to electrical wire and cable. Accordingly, the retail sale and installation of cash registers and office printers constitute taxable sales of tangible personal property. However, separately stated installation labor charges are not taxable.
Maintenance Contracts
Real property maintenance services. As provided by Tax Bulletin 95-8 (9/27/95), copy enclosed, persons who provide maintenance of real property are deemed to be real property contractors. Such contractors are the users and consumers of all property which becomes realty upon installation and must pay the tax on the cost price of such property. Thus, when the Taxpayer contracts to maintain the entire integrated fuel delivery system or specific components thereof, it is providing real property maintenance services and is liable for the tax based on the cost price of the replacement parts installed.
Based on the tangible and real property classifications set out above, the audit may be revised to remove those maintenance contracts which the Taxpayer is able to establish are only for real property coverage, i.e., a contract which does not contain any tangible property coverage, such as maintenance on cash registers, office printers, or other tangible articles which remain personal property upon installation.
Maintenance contracts for tangible personal property only. The charge for a contract to provide repair labor and replacement parts for cash registers, office printers, or other articles of tangible personal property which remain personal property upon installation is subject to the sales tax based on the total charge for such contracts entered into before January 1, 1996, and on one-half of the total charge for such contracts entered into on or after January 1, 1996. Such contracts will remain in the audit.
Maintenance contracts for tangible and real property coverage. It is my understanding that, for a lump-sum price, the Taxpayer entered into some maintenance contracts for the provision of replacement parts and repair labor to maintain tangible and real property. Generally, a maintenance contract of this nature is problematic, unless two charges are stated in the contract, i.e., a taxable charge for the personal property coverage and an exempt charge for the real property coverage.
For those maintenance contracts which provide for both tangible and real property coverage, the audit may be revised to tax only that portion of the charge which can be reasonably allocated to the personal property portion of the contract. In such instances, however, the Taxpayer is liable for the tax on the cost price of the real property components.
Unremitted sales tax measure
Itemizing the tax on invoices for real property installations conflicts with the established rules set out in Title 23 of the Virginia Administrative Code (VAC) 23 10210-410(A) which state:
Furthermore, when any tax is collected in excess of a 4.5% rate or which is otherwise erroneously or illegally collected, the amount overcollected or erroneously or illegally collected must be remitted to the department. This is consistent with 23 VAC 10-210-340(D) and Code of Virginia § 58.1-625.
The Taxpayer maintains that it has met its obligation as a contractor for payment of the tax when it paid tax to its suppliers on purchases of equipment and materials in connection with cost-plus invoicing. As an example, you cite on page 5 of your letter that the Taxpayer paid sales tax on the cost price of tangible items transferred to its customers, and that the tax was shown on the invoices in this manner.
It is my understanding, however, that the amount of tax actually itemized on the Taxpayer's invoices was computed differently. Instead of showing $**** as sales tax paid on a $****** taxable purchase on the customer's invoice, it is my understanding that the actual tax amount shown was $**** based on the $***** purchase with a $***** markup. Such invoicing is indicative of the Taxpayer collecting more tax than it had paid on the cost price of parts and materials. At a minimum, such unremitted tax differences must be accounted for and are properly included in the audit.
This issue consists of the sales measures labeled as S-2 and S-3 in the audit. The S-2 sales measure covers the period May 1992 through April 1995, and the S-3 sales measure covers the period May 1995 through January 1998. Although a credit was given for sales tax paid on items transferred to customers under cost-plus contracts for the S-2 period of the audit, a similar credit was not provided against the S3 sales measure. Under these circumstances, however, l find no basis to disallow a similar credit for the S-3 sales measure. Therefore, such credit allowance will substitute for the Taxpayer's request for a refund of such tax.
Freight-in charges
Pursuant to 23 VAC 10-210-6000, transportation-in charges from the vendor to the seller are considered a taxable part of the sales price. However, separately stated transportation-out charges from the seller to the consumer are exempt from the tax.
Based on the real property classifications set out above, some of the freight-in charges may be reclassified as exempt transportation-out charges if they are made in connection with a real property fixture installed by the Taxpayer as final consumer, and the charge was for delivery of such item from the vendor to the Taxpayer.
Conclusion
Based on the policies set out above, the audit will be revised in the following manner:
The audit will be revised in accordance with this determination and as soon as practical. Upon revision of the audit, a revised bill will be sent to the Taxpayer for the outstanding liability.
I believe this determination should settle all of the issues presented. If you have any questions about this response, please contact *** of my Tax Policy staff at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer") as a result of an audit. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is engaged in the construction and repair of service stations and in installing and repairing service station fuel dispensers. An audit for the period May 1992 through January 1998 resulted in an assessment of use tax on untaxed purchases and sales tax on untaxed sales, maintenance agreements, and rentals of tangible personal property. The assessment also includes unremitted sales tax.
The Taxpayer takes exception to part of the assessment and maintains that it should be treated as a real estate contractor in regard to the integrated fuel delivery systems that it acquires and installs at gas stations. Although it separately stated sales tax on its invoices, the Taxpayer maintains that it operated only as a real property contractor and did not collect any sales tax from its customers. The Taxpayer also takes exception to the sales tax assessed on maintenance agreements, and maintains that the allocation of the tax used in the audit between the real and tangible portions of the agreements is unfair. Alternatively, the Taxpayer requests a refund of the sales tax paid on tangible items furnished in connection with gas station maintenance contracts.
The Taxpayer does not contest the purchases portion of the assessment, nor does it contest the equipment rentals held in the audit.
DETERMINATION
Real property versus personal property installations
The distinctions made between real and tangible personal property have been addressed by the Virginia Supreme Court in Danville Holding Corp. v. Clement, 178 Va. 223 (1941) and confirmed in later cases, such as Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970). In Danville Holding, the Court set out three primary factors for determining whether property used in connection with realty is a fixture: "(1) Annexation of the chattel to the realty, actual or constructive; (2) Its adaptation to the use or purpose to which that part of the realty to which it is connected is appropriated; and (3) The intention of the owner of the chattel to make it a permanent addition to the freehold."
The Court in Danville Holding stated that "adaptation of the chattel to the use of the property to which it is annexed is entitled to great weight, especially in connection with the element of intention. If the chattel is essential to the purposes for which the building is used or occupied, it will be considered a fixture, although its connection with the realty is such that it may be severed without injury to either." Although essentiality of purpose and annexation to the realty are important considerations, the Court further stated that "the intention of the party making the annexation is the paramount and controlling consideration."
Integrated Fuel Delivery System. The integrated fuel delivery systems consist of underground storage tanks, underground liquid and vapor lines, fuel delivery lines, electrical wiring, plumbing lines, concrete islands and pads, fuel dispensers (i.e., fuel pumps), and consoles (i.e., the master controls which house a computer to control gasoline flow from the dispenser, record the grade of gasoline selected, calculate the volume dispensed, compute the price of the gasoline, and enable and disable the dispensers). Component parts of these systems include the dispenser island enclosure/pedestal, dispensing hoses and nozzles, valves, meters, fuel filters, and credit card readers and printers specially designed and constructed to be housed within the dispenser island pedestal/enclosure.
The information presented shows that the integrated fuel delivery system is joined to the realty, suitable and essential to the use or purpose to which that part of the realty is used, and as you indicate, intended by the owner to become a permanent addition. Accordingly, the integrated fuel delivery systems, and the individual components of such systems, are deemed to be real property fixtures for retail sales and use tax purposes. This determination is consistent with the determinations made in Public Documents (P.D.) 87-131 (4/21/87), 91-141 (7/31/91) and 93-23 (2/9/93).
When the Taxpayer sells and installs integrated fuel delivery systems or component parts of such systems, the transaction is for real property construction or installation services, the charge for which is not taxable. In such instances, the Taxpayer is liable for the sales or use tax based on the cost price of the component parts of such systems.
However, when the Taxpayer sells such systems or component parts of such, without installation at retail, it must charge and collect the sales tax based on the sales price charged the customer.
Cash register and office printer. By their very nature and purpose, I find that it would be difficult to consider these items as fixtures to the realty. These items are freestanding and serve a facilitative role rather than an essential and indispensable role in the operation of the integrated fuel delivery system. In P.D. 99-106 (5/6/99), copy enclosed, I would note that the department did not disagree with the taxpayer's classification of a cash register as tangible personal property even though connected to electrical wire and cable. Accordingly, the retail sale and installation of cash registers and office printers constitute taxable sales of tangible personal property. However, separately stated installation labor charges are not taxable.
Maintenance Contracts
Real property maintenance services. As provided by Tax Bulletin 95-8 (9/27/95), copy enclosed, persons who provide maintenance of real property are deemed to be real property contractors. Such contractors are the users and consumers of all property which becomes realty upon installation and must pay the tax on the cost price of such property. Thus, when the Taxpayer contracts to maintain the entire integrated fuel delivery system or specific components thereof, it is providing real property maintenance services and is liable for the tax based on the cost price of the replacement parts installed.
Based on the tangible and real property classifications set out above, the audit may be revised to remove those maintenance contracts which the Taxpayer is able to establish are only for real property coverage, i.e., a contract which does not contain any tangible property coverage, such as maintenance on cash registers, office printers, or other tangible articles which remain personal property upon installation.
Maintenance contracts for tangible personal property only. The charge for a contract to provide repair labor and replacement parts for cash registers, office printers, or other articles of tangible personal property which remain personal property upon installation is subject to the sales tax based on the total charge for such contracts entered into before January 1, 1996, and on one-half of the total charge for such contracts entered into on or after January 1, 1996. Such contracts will remain in the audit.
Maintenance contracts for tangible and real property coverage. It is my understanding that, for a lump-sum price, the Taxpayer entered into some maintenance contracts for the provision of replacement parts and repair labor to maintain tangible and real property. Generally, a maintenance contract of this nature is problematic, unless two charges are stated in the contract, i.e., a taxable charge for the personal property coverage and an exempt charge for the real property coverage.
For those maintenance contracts which provide for both tangible and real property coverage, the audit may be revised to tax only that portion of the charge which can be reasonably allocated to the personal property portion of the contract. In such instances, however, the Taxpayer is liable for the tax on the cost price of the real property components.
Unremitted sales tax measure
Itemizing the tax on invoices for real property installations conflicts with the established rules set out in Title 23 of the Virginia Administrative Code (VAC) 23 10210-410(A) which state:
-
- A contractor, whether he be a prime contractor or subcontractor, does not pass the sales or use tax on to anyone else as a tax. He will take the amount of the tax into consideration in submitting bids. (Emphasis added.)
- A contractor, whether he be a prime contractor or subcontractor, does not pass the sales or use tax on to anyone else as a tax. He will take the amount of the tax into consideration in submitting bids. (Emphasis added.)
Furthermore, when any tax is collected in excess of a 4.5% rate or which is otherwise erroneously or illegally collected, the amount overcollected or erroneously or illegally collected must be remitted to the department. This is consistent with 23 VAC 10-210-340(D) and Code of Virginia § 58.1-625.
The Taxpayer maintains that it has met its obligation as a contractor for payment of the tax when it paid tax to its suppliers on purchases of equipment and materials in connection with cost-plus invoicing. As an example, you cite on page 5 of your letter that the Taxpayer paid sales tax on the cost price of tangible items transferred to its customers, and that the tax was shown on the invoices in this manner.
It is my understanding, however, that the amount of tax actually itemized on the Taxpayer's invoices was computed differently. Instead of showing $**** as sales tax paid on a $****** taxable purchase on the customer's invoice, it is my understanding that the actual tax amount shown was $**** based on the $***** purchase with a $***** markup. Such invoicing is indicative of the Taxpayer collecting more tax than it had paid on the cost price of parts and materials. At a minimum, such unremitted tax differences must be accounted for and are properly included in the audit.
This issue consists of the sales measures labeled as S-2 and S-3 in the audit. The S-2 sales measure covers the period May 1992 through April 1995, and the S-3 sales measure covers the period May 1995 through January 1998. Although a credit was given for sales tax paid on items transferred to customers under cost-plus contracts for the S-2 period of the audit, a similar credit was not provided against the S3 sales measure. Under these circumstances, however, l find no basis to disallow a similar credit for the S-3 sales measure. Therefore, such credit allowance will substitute for the Taxpayer's request for a refund of such tax.
Freight-in charges
Pursuant to 23 VAC 10-210-6000, transportation-in charges from the vendor to the seller are considered a taxable part of the sales price. However, separately stated transportation-out charges from the seller to the consumer are exempt from the tax.
Based on the real property classifications set out above, some of the freight-in charges may be reclassified as exempt transportation-out charges if they are made in connection with a real property fixture installed by the Taxpayer as final consumer, and the charge was for delivery of such item from the vendor to the Taxpayer.
Conclusion
Based on the policies set out above, the audit will be revised in the following manner:
- Amend the S-3 sales measure to allow a credit for taxes paid as similarly provided in the S-2 sales measure;
- Amend the sales measure for maintenance agreements to remove those charges which are only for real property fixtures;
- Amend the sales measure for maintenance agreements which provide for real and tangible property coverage by taxing only the tangible property portion based on a reasonable allocation to be made between the real and tangible property components of such agreements; and
- Amend the freight-in charges by removing those charges related to real property fixtures provided the Taxpayer installed such and the charge can be properly reclassified as "transportation-out" charges from the vendor to the Taxpayer.
The audit will be revised in accordance with this determination and as soon as practical. Upon revision of the audit, a revised bill will be sent to the Taxpayer for the outstanding liability.
I believe this determination should settle all of the issues presented. If you have any questions about this response, please contact *** of my Tax Policy staff at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner