03-87 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Dual-role business of installing cable, telecommunications & computer systems

Topic

Appropriateness of Audit Methodology

Property Subject to Tax

Date Issued

11-12-2003

November 12, 2003

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period of August 1998 through September 2001.

FACTS

The Taxpayer is in a dual-role business of cable installation and installing complete telecommunications and computer systems. The Taxpayer has treated all aspects of its business as retail sales, including the installation of cable in walls, ceilings, and floors. The Taxpayer purchased all cable exempt of the tax for resale and charged tax to the customer at the time of installation. Upon audit, and in keeping with the Department's policy that the installer of cable is the using and consuming contractor, the auditor assessed tax on the cost price of all cable purchases.

It is the Taxpayer's position that the Department's policy with respect to cable installation is antiquated and based on technological advances that were in line with the regulation revisions of 1985. The Taxpayer believes that based on today's technology, cable that is installed in walls, ceilings and floors has a useful life of three to six years, is generally removed when its useful life is over, and should not be considered a part of real estate. Accordingly, the Taxpayer is requesting the Department to revisit its policy with respect to the installation of cable for telecommunications and computer systems.

The Taxpayer also believes that a recent opinion of the Ohio Board of Tax Appeals should carry some weight in the present case. The Ohio decision, Newcome Corporation v. Tracy, Dk. No. 97-M-320 (Dec. 11 1998), concluded that the installation of computer cabling did not become real property when installed in buildings, but retained its status of tangible personal property. This decision reversed established sales and use tax policy of the Ohio Department of Taxation.

In addition, the Taxpayer believes that it falls in the classification of an Innovative High Technology Industry that enjoys the industrial manufacturing exemption and the sales tax applies to the total charge to the purchaser of the system, including cabling.

DETERMINATION

As noted above, it has been the Department's long-standing policy that cabling installed in walls, floors and ceilings becomes a part of real property, and the installer is the using and consuming contractor of such cable. At the time of the Taxpayer's previous audit, for the period July 1992 through June 1995, the Taxpayer was predominantly a cable installer and, to a lesser degree, sold telecommunications systems. The Taxpayer was audited as a contractor with respect to cable installation and as a retailer for all tangible personal property sold. The Taxpayer was also provided with copies of ruling letters setting forth the Department's policy with respect to cable installation and the treatment of such installations as real property improvements.

The Taxpayer experienced unusually rapid growth since the prior audit. I understand the Taxpayer amended its accounting practices and was purchasing all cable tax exempt and treating the installation of cable as a retail sale. In light of the most recent audit findings, the Taxpayer is now requesting that the Department review its policy with respect to cable installation with the prospect of reversing such policy.

While your point is well taken in the matter of Newcome Corporation v. Tracy, issued by the Ohio Board of Tax Appeals, decisions by other taxing jurisdictions do not supersede established Virginia policy. As provided above, the treatment of cable installation in walls, ceilings and floors is long-standing and well founded, as can be seen in Public Document's 95-295 (11/16/05) and 92-29 (4/20/92). Further, it appears that the Newcome case was decided in large part on recent revised definitions of "fixtures" and "personal property" in the Ohio statutes.

Also, I cannot agree with the Taxpayer that the auditor incorrectly classified the Taxpayer under Title 23 of the Virginia Administrative Code (VAC) 10-210-5040 as an installer of telecommunications systems, as opposed to an Innovative High Technology business. According to the auditor's comments, the Taxpayer's primary business activity is the sale and installation of telecommunications systems, and the installation of cabling independent of the sale of a system. The installation of cabling in walls, floors and ceiling is considered a real property contract, regardless of the industry classification of the installer.

It is noted in your letter and the auditor's comments that the Taxpayer was assessed tax on all cable installed in walls, floors and ceiling during the audit period. At the same time, the Taxpayer had collected the sales tax on these same items from Virginia customers. It is also noted that the Taxpayer changed its accounting procedures to conform to Virginia tax laws with an effective date of October 2001. In the event the Taxpayer has not refunded Virginia sales and use tax incorrectly collected on cabling to Virginia customers, I will allow a credit of taxes collected and remitted against taxes assessed on cabling in the audit. Therefore, the audit will be returned to the auditor. Upon verification of this credit by the auditor, adjustments will be made as warranted and a revised assessment will be issued to the Taxpayer.

Copies of the Code of Virginia, regulations and public documents 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 regarding this determination, you may contact *****, Office of Policy and Administration, Policy Development, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

PD/41335K
PD 07-135 overturns that portion of Public Document 03-87 that granted the taxpayer a credit against the use tax assessment for the amount of sales tax erroneously collected

Rulings of the Tax Commissioner