04-22 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Fabrication; Credit; Consumer Use Tax

Topic

Appropriateness of Audit Methodology

Computation of Tax

Date Issued

06-02-2004

June 2,2004

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

Dear ***********:

This will reply to your letters in which you seek correction of the retail sales and use tax assessments issued to *********** (collectively, the "Taxpayers") for the periods October 1996 through September 1998 and January 1995 through September 1999, respectively. I apologize for the delay in responding to your letters.

FACTS

The Taxpayers are out-of-state contractors that furnish and install structural steel, steel stairs, and steel railings in the performance of real property construction contracts in Virginia. The Taxpayers were audited and assessed use tax on labor charges to fabricate tangible personal property for use in their Virginia construction contracts. The Taxpayers are also contesting the assessment of use taxes on freight charges and on amounts representing sales taxes paid. In addition, the Taxpayers maintain that Virginia use taxes were paid with a corporate income tax filing but credit was not given in the audit for these payments.

DETERMINATION

Fabrication Labor

The Taxpayers purchase steel from out-of-state suppliers and direct the suppliers to ship the steel to out-of-state fabricators. The materials are fabricated into stairs, railings, fencing, etc., and then shipped to Virginia construction sites. The fabricated items are then installed at the job sites. The Taxpayers maintain that they should be classified as fabricators of the type found in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(D). This regulation states that contractors who fabricate tangible personal property for their own use in real property construction must pay the tax on the cost price of the raw materials that are fabricated. This section of the regulation does not apply the tax to fabrication labor. The Taxpayers believe that this regulation is applicable to their business operations and relieves them from any sales and use tax liability on the labor charges for the fabrication of materials used in Virginia real property construction.

Virginia Code § 58.1-610(A) makes construction contractors the taxable users or consumers of all tangible personal property purchased, used, or stored in Virginia in connection with real estate construction contracts. A contractor or subcontractor performing real property construction in Virginia does not collect sales tax from his customer but instead pays sales or use tax on all purchases of tangible personal property used or consumed in this state.

Virginia Code § 58.1-604 imposes a use tax on the cost price of tangible personal property used or consumed in Virginia. This code section states that tangible personal property acquired outside the State of Virginia and then used or consumed in Virginia within 6 months of its acquisition is subject to use tax on the cost price of the property. Cost price is defined in Va. Code § 58.1-602 as:

- the actual cost of an item or article of tangible personal property computed in the same manner as sales price as defined in this section without any deduction therefrom on account of the cost of materials used, labor, or service costs ....

The term "sales price" includes "the total amount for which tangible personal property or services are sold .... " (Emphasis added.) The term "sale" is defined in Va. Code § 58.1-602 to include the fabrication of tangible personal property for consumers who furnish the materials to be fabricated. Thus, Virginia use tax applies to charges for the fabrication of tangible personal property for users or consumers who furnish either directly or indirectly the materials that are fabricated. The Taxpayers do not dispute that the assessed charges represent "fabrication" as defined in Title 23 VAC 10-210-560.

Based on the information provided, the Taxpayers do not perform fabrication services. The Taxpayers contract with other parties to fabricate the materials that are used by them in Virginia real property construction projects. The provisions of Title 23 VAC 10-210-410(D) are applicable to contractors that perform the actual fabrication of tangible personal property for their own use in real property construction. The Taxpayers are construction contractors only and, for this reason, this subsection of the regulation does not apply to the Taxpayers' business activities. The labor charges billed to the Taxpayers for the fabrication of materials used in Virginia real property construction jobs were properly assessed.

Freight

Virginia Code § 58.1-609.5(3) provides an exemption from the sales and use tax for separately stated transportation charges. The Taxpayers have provided invoices showing that freight charges were included in the audit assessment. Many of the invoices contain charges billed by transportation companies for freight. These charges will be removed from the audit based on the invoices provided.

Credit for Virginia Tax

The Taxpayers calculated and reported consumer use tax on their 1997 Virginia corporate income tax return. Many of the self-assessed items reported on the Taxpayers’ income tax return were included in the audit. A review of the schedule and supporting documentation provided by the Taxpayer indicates that the assessment should be reduced to reflect use tax paid to the Department on transactions that were also included in the audit.

Sales Tax Included in Taxable Amounts

The Taxpayers state that some of the assessed purchase amounts include sales taxes paid. The invoices provided by the Taxpayers will be reviewed and any separately stated sales taxes erroneously included as taxable purchases in the audit will be removed.

Conclusion

The documentation provided by the Taxpayers will be forwarded to the Department's audit staff to make the necessary adjustments to the audit. A member of the audit staff will contact you and provide the audit revisions to you. Any outstanding balance remaining after the revisions are made should be paid within 30 days to avoid the accrual of additional interest and penalties. Payment may be mailed to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P. O. Box 1880, Richmond, Virginia 23218-1880, Attention: *****.

If you have any questions concerning the audit revisions, please contact ***** at *****. Questions regarding this determination should be directed to ************ at *****.

The Code of Virginia sections and regulations cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        
        Tax Commissioner

AR/30265S

Rulings of the Tax Commissioner