Tax Type
Retail Sales and Use Tax
Description
Using and consuming real property contractor
Topic
Exemptions
Property Subject to Tax
Date Issued
10-07-2005
October 7, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period March 2002 through December 2004.
FACTS
The Taxpayer entered into a contract with a Virginia public school system (the "School System") to sell, install and maintain athletic scoreboards at various school sites in the school district. The Taxpayer treated the transactions as exempt retail sales to the School System based on the government exemption in Va. Code § 58.1-609.1 4. The Taxpayer purchased the scoreboards and installation materials exempt of the tax using the resale exemption.
The Department audited the Taxpayer and treated the Taxpayer as a using and consuming real property contractor. The Department assessed use tax on the Taxpayer's purchase of the scoreboards and installation materials. The Taxpayer maintains that the scoreboards do not become real property upon installation and that the Department has not previously categorized scoreboards as real property in published rulings. The Taxpayer also suggests that the provisions of Virginia Tax Bulletin ("VTB") 92-2 (4/1/92) apply to the transactions with the public school system.
DETERMINATION
Real Property versus Tangible Personal Property
The central issue in this case is whether the scoreboards installed by the Taxpayer become real property upon installation. As the Taxpayer notes, the Virginia Supreme Court has addressed the distinctions between real property and tangible personal property in Danville Holding Corp. v. Clement, 178 Va. 223, 16 S.E.2d 345 (1941). The Court recited three 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."
A review of the Taxpayer's contract with the public school system indicates that the installation of the scoreboards includes digging footings, placing I-beams on poles, pouring concrete, and mounting the scoreboard and presentation panel. The scoreboards range in size from 8 feet to 36 feet in width and 5 to 8 feet in height. The scoreboards are mounted 10 feet above the ground on poles. The footings and (beams must withstand wind speeds of up to 100 miles per hour. A licensed electrician runs an electrical supply to the scoreboards using buried cable and makes the necessary electrical connections. Control cable placed in conduit is also run to the scoreboards.
In accordance with the court decisions above, 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 scoreboards are erected for use with the schools' athletic facilities. Thus, the scoreboards are adapted to the use of the real property, i.e., the athletic facility. The extent of the work required to install the scoreboards indicates that the School System does not intend for the scoreboards to be easily moved after they are installed. Careful consideration of the factors discussed above leads me to conclude that the intention of the School System is to make the scoreboards a permanent part of the real estate. Therefore, the Taxpayer was acting as a real property contractor.
Public School Equipment
The Taxpayer maintains that the provisions of VTB 92-2 apply to the sale and installation of the scoreboards. This bulletin addresses the application of the government exemption in Va. Code § 58.1-609.1 4 to contractors performing real property contract work for public school systems. VTB 92-2 discusses three exceptions to the general rule that real property contractors pay the tax on all purchases of tangible personal property furnished and installed under real property contracts.
First Exception
Under Va. Code § 58.1-610 B, governmental entities, e.g., public school systems, may purchase construction materials directly and turn the materials over to a contractor for installation without making the contractor liable for use tax on the materials. The Taxpayer has not provided evidence that the School System made direct purchases of scoreboards and installation materials and provided the items to the Taxpayer for installation.
Second Exception
School systems may also structure the bidding and acceptance of contracts so that furnishing tangible personal property for a real property job is separate and distinct from the installation of the materials. When contracts are structured separately, furnishing the property is a retail sale to the public school. The public school may then provide the materials to the installer, who qualifies for the exemption in Va. Code § 58.1-610 8.
The Taxpayer entered into one contract with the School System to furnish, install and maintain the scoreboards. VTB 92-2 requires that the bidding and acceptance of the contracts be totally separate and distinct. The contract provided by the Taxpayer indicates that furnishing the scoreboards is not separate and distinct from the installation of the scoreboards. In addition, there is no evidence that the bidding and acceptance process for the sale and installation of the scoreboards was separate and distinct. The Taxpayer does not meet this exception.
Third Exception
The Taxpayer suggests that it should be treated in accordance with the third exception in VTB 92-2, which discusses the provisions of Va. Code § 58.1-610 D. Virginia law treats businesses that sell and install certain products including fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, kitchen equipment, window air conditioning units, and other like or similar items as retailers although the items they sell become real property upon installation. I do not agree that athletic scoreboards are like or similar to the products listed. The provisions of Va. Code § 58.1-610 D are not applicable to the Taxpayer's sale and installation of scoreboards.
Federal and Local Government Classification
The Taxpayer states that the local government and the Internal Revenue Service classify scoreboards as tangible personal property. While the Department may consider property classifications made by local governments and the Internal Revenue Service, this is done on a case-by-case basis. The Department primarily relies on the criteria established in the court case previously discussed.
The Taxpayer suggests that the scoreboards are analogous to car wash equipment discussed in Public Document (P.D.) 04-27 (6/10/04). In P.D. 04-27, the Department determined that certain car wash equipment remained tangible personal property after installation, which was consistent with a local government's classification of the property. The local tax classification of the property was not the determining factor in this particular case; it merely supported the Department's conclusion. Regardless of how the scoreboards are classified for local tax purposes or by the Internal Revenue Service, I do not agree that the scoreboards remain tangible personal property after installation by the Taxpayer.
CONCLUSION
Based on the determination above, the audit assessment is correct. The Department's records indicate that the Taxpayer has paid the contested assessment in full.
The Code of Virginia sections, tax bulletin, public document and regulation cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If the Taxpayer has any questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/54965S
Rulings of the Tax Commissioner