Document Number
03-75
Tax Type
Retail Sales and Use Tax
Description
Governmental entity, Real property construction contractors
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
10-27-2003
October 27, 2003







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 ************ (the "Taxpayer") as a result of an audit for the period April 1999 through January 2002. I apologize for the delay in responding to your letter.
FACTS

The Taxpayer is a pile-driving contractor. As a result of the Department's audit, use tax was assessed on purchases of tangible personal property purchased by the Taxpayer for use or consumption in two real property construction projects. I understand that the Taxpayer subcontracted with a general contractor who had contracted with the Industrial Development Authority of the ***** (the "IDA"). I also understand that the subcontracts required the Taxpayer to furnish construction labor and materials and to permanently affix those materials to realty. The Taxpayer contests the entire assessment ***** and maintains that these purchases qualify for the governmental exemption under Va. Code § 58.1-609.1(4), based on the Form ST-12 exemption certificate issued by the IDA to the general contractor.

As a result of the same audit, the Taxpayer initially received an assessment for the period March 1999 through January 2002. That assessment ***** did not include any of the contested purchases and has been paid.

DETERMINATION

Government contracts

Pursuant to Title 23 of the Virginia Administrative Code ("VAC") 10-210-693, the application of the tax to government contracts is set out as follows:
    • The appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property (e.g., a computerized data retrieval system) or for the provision of an exempt service (e.g., facilities management or real property construction). If a contract is for the sale of tangible personal property, a contractor may purchase such tangible personal property exempt from the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.
    • However, if a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing its services, even though title to the property provided may pass to the government or the contractor may be fully and directly reimbursed by the government, or both. [Emphasis added.]

Because the contested purchases were made by the Taxpayer pursuant to real property construction contracts, those purchases cannot be deemed resold or otherwise sold at retail to the general contractors. Rather, the Taxpayer is deemed to be the final user or consumer of the property pursuant to those contracts.

Exceptions

Although real property construction contractors are generally deemed the final taxable users or consumers of all tangible personal property purchased for use or consumption under such contracts, one exception to this general tax rule is set out in Va. Code § 58.1-610(B) for property furnished to the contractor by a political subdivision of the Commonwealth. That exception, however, does not apply to the contested purchases because the IDA did not buy the items directly from the vendor and then turn them over to the Taxpayer to use in the performance of the required services under the subcontract.

The only other possible exception to the above general tax rule is "[when] the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax." See 23 VAC 10-210-410(]) on government contracts involving real property construction. This regulation is consistent with United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), affd, 569 F. 2d 881 (4th Cir., 1978), which upheld the application of the Virginia sales and use tax to purchases made by a government contractor because "the legal incidence of the Virginia sales tax is on the purchaser." Consequently, a contractor purchasing on behalf of one who holds an exemption is not entitled to the same exemption unless the credit of the exempt entity "is bound by the purchasing agreement with the seller." In this case, however, no evidence has been presented that the credit of the IDA was bound directly to the contested purchases.

Form ST-12 exemption certificate

You maintain that the Taxpayer relied in good faith upon the Form ST-12 exemption certificate issued by the IDA to the general contractor. If this exemption certificate was issued in error to the Taxpayer as subcontractor, you maintain that "the enforcement action should be against those who incorrectly issued the certificates."

Pursuant to 23 VAC 10-210-280(B), "[a]n exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate." For instance, the Form ST-12 exemption certificate is designed to notify suppliers that a purchase by a political subdivision of Virginia using public funds qualifies for exemption from the retail sales and use tax. In this case, however, the exemption certificate was not used according to the exact wording of the certificate.

For example, the Form ST-12 exemption certificate as completed shows the general contractor as the dealer, rather than the supplier of the contested materials. Clearly, the tangible personal property cannot be considered "purchased or leased from the above dealer" (i.e., the general contractor) when the contested materials were actually purchased from someone else.

In addition, the contested materials were purchased by the Taxpayer using its own funds and credit. Consequently, it is entirely unacceptable for the Taxpayer to use the IDA exemption because the contested purchases were not "paid for out of public funds" as intended by the Form ST-12 exemption certificate.

Based on all of the foregoing, the Taxpayer's use of the Form ST-12 exemption certificate is invalid and, therefore, was never acceptable under the circumstances of this case. Accordingly, the Taxpayer's contention that it relied upon the exemption certificate in good faith is not a valid argument.

Ultimate liability rests with Taxpayer

As the true purchaser of the contested materials used in real property construction, the Taxpayer is directly and ultimately liable for the retail sales and use tax pursuant to Va. Code § 58.1-610. For this reason, the Department is completely within its authority to issue the assessments to the Taxpayer for the omitted taxes, including the associated interest accrued on those taxes.

Two assessments

You are concerned that the Taxpayer was issued two assessments rather than one. Typically, when contested issues are known in advance, the Department issues two separate assessments, i.e., one for the contested portion of the audit and the other for the noncontested portion of the audit. The law does not preclude the Department from separating assessments in this manner or making additional timely assessments as needed.

In this case, the contested portion of the audit was assessed several weeks after the initial assessment because further investigation subsequently revealed that the Taxpayer was not an official purchasing agent of the IDA. Although the second assessment covers almost all of the same periods as the first assessment, it does not duplicate any of the purchases of the first assessment. Furthermore, the second assessment is minus one reporting period because of the postponement in issuing it. For these reasons, the issuance of separate assessments is valid.
CONCLUSION

Based on this determination, the assessment is correct. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter. Please remit your payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention:*****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections and the regulations cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

                • Sincerely,


                • Kenneth W. Thorson
                  Tax Commissioner


AR/42187R

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46