Tax Type
Retail Sales and Use Tax
Description
Taxpayer believes subcontractor should be treated as the taxable consuming contractor
Topic
Tangible Personal Property
Taxability of Persons and Transactions
Date Issued
07-07-2010
July 7, 2010
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 January 2005 through January 2008. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a general contractor. As a result of an audit, the Taxpayer was assessed use tax on several purchases of tangible personal property. The Taxpayer contends that it is not liable for the assessed tax with respect to several transactions. The Taxpayer contends that the tax should be paid by its subcontractors because their subcontracts with the Taxpayer were labor only or lump-sum real property subcontracts. The auditor has previously revised the audit to remove the entire penalty and a portion of the tax assessed based on information submitted before the appeal was filed.
DETERMINATION
Landscaping Contractor
The Taxpayer contends that a certain subcontractor should be treated as the taxable consuming contractor of the plant materials, plants, seeding, sod, mulch, landscape accessories and irrigation system furnished and installed by it.
Title 23 of the Virginia Administrative Code 10-210-610 treats a transaction to furnish and install plants and trees as the retail sale of tangible personal property. In Public Document (P.D.) 07-171 (11/7/07), the Department changed its policy regarding such transactions that become real property upon installation. Construction contractors, landscape contractors and other persons that perform real property services such as construction site preparation, excavation, erosion control, drainage and irrigation system installation, debris removal and similar services are no longer treated as retailers with respect to the furnishing and installation of trees, shrubbery, nursery stock, plants, sod, silt fence and similar items. These businesses are treated as the taxable users or consumers of the trees, plant materials, sod, silt fence and similar items and must pay the applicable sales tax when purchasing these items from vendors or suppliers.
For job #4142360, the Taxpayer hired a subcontractor to perform real property services, such as an irrigation system installation and site preparation. Because of these real property services, I find that the subcontractor acts as a real property construction contractor and thus should be treated as the taxable user of the items that it furnished and installed in the real estate, including plant materials. Accordingly, line items 27, 28, 29 and 30 will be removed from the revised audit. Based on the revised landscape policy and the fact that the same subcontractor furnished and installed plants in connection with job #41311301, I also find basis to remove line item 26 from the revised audit. For the same reasons as stated above, I also find basis to remove the following line items from the revised audit: 1, 2, 3, 16, 46, 47, 48, 62 and 63.
Concrete - Pump, Place and Finish
The auditor assessed tax on concrete sold by a certain subcontractor. The Taxpayer contends, however, that such subcontractor was hired only to pump, place and finish a concrete slab at a military installation and did not furnish the concrete materials. The concrete materials were furnished and delivered to the jobsite by a different party who charged the sales tax to the Taxpayer. The Taxpayer contends that a use tax should have been paid by the subcontractor.
Based on the facts presented, the concrete materials were correctly taxed. As the purchaser of the concrete materials, the Taxpayer is directly liable for the tax. If no tax had been paid on such purchases, the subcontractor installing the concrete materials into the realty could also have been liable for the tax pursuant to Va. Code § 58.1-610 B. Based on this statute and Va. Code § 58.1-604, the Department may assess a use tax to either the user (the subcontractor) or the purchaser (the Taxpayer) for any unpaid sales tax liability. Because the sales tax liability has been fulfilled, there is no further tax liability owed on the concrete materials.
Based on the documentation presented, it is apparent that the subcontractor hired to pump, place and finish the concrete materials was not the supplier of such materials and thus only supplied labor and the equipment needed to perform its services. For these reasons, I find basis to remove line items 49, 50, 51 and 52 from the revised audit.
Reach-in and Walk-in Refrigeration Equipment
The Taxpayer contracted to renovate and upgrade a military exchange store in Virginia. A change order subsequently modified the contract to include the provision of a complete refrigeration system (i.e., reach-in coolers and freezers, a walk-in beer cooler, and refrigeration system equipment including outdoor condensing units, condensate lines, and connections), which was assessed in the audit. The Taxpayer subcontracted out the furnishing and installation of the refrigeration equipment. The Taxpayer contends that the subcontractor hired by the Taxpayer to furnish and install a complete refrigeration system is the taxable consumer of such items.
Based on P. D. 91-254 (10/8/91), the Department generally treats walk-in coolers and freezers installed in retail establishments as tangible personal property after installation. An exception to this general rule was made in P.D. 94-142 (4/29/94), which determined that a refrigeration system used in a restaurant and furnished by the lessor become a fixture of the realty. To determine whether another exception can be made to the above general rule, the facts and circumstances must be examined on a case-bycase basis. In this regard, the Taxpayer has the burden of proving 1 that the refrigeration equipment installation was intended to be permanently affixed to the realty as to become a permanent part of such realty. When there is no specific agreement between the parties as to the character of the chattel placed upon the freehold, the Virginia Supreme Court has adopted three general tests to determine whether the chattel becomes a part of the realty. See Danville Holding Corp. v. Clement, 178 Va. 223, 232 (1941) and Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970). These tests are:
- 1)Annexation of the property to the realty;
2)Adaptation to the use or purpose to which that part of the realty with which the personalty is connected is appropriated; and
3)The intention of the parties.
In this case, none of these tests are readily ascertainable from the contracts and facts presented. First, there is no mention in the documents presented as to the manner of permanent attachment or annexation, if any, of the coolers to the store. Secondly, no evidence is provided that the refrigeration equipment was specifically adapted to the use of the store as to enhance its usefulness and market value. Thirdly, the contract documents provide no evidence as to the government's intent to make the coolers a permanent addition to the store.
Furthermore, while the architectural plans presented for the store's floor and interior elevations indicate the locations of the refrigeration equipment, the plans provide locations for shelving, barber chairs, chairs and tables for break room, office and retail areas, display racks and potentially other items of tangible personal property. The inclusion of the refrigeration equipment in the architectural plans does not, by itself, provide any evidence that such equipment became a permanent part of the realty.
The Virginia Supreme Court ruled in Mullins v. Sturgill, 192 Va. 653, 659 (1951), that "[i]n order that a chattel may be converted into a fixture, the intention to make it a permanent accession to the realty must affirmatively and plainly appear; if the matter is left in doubt and uncertainty, the legal qualities of the article are not changed, and it must be deemed a chattel." [Emphasis added.] In P.D. 95-32 (3/1/95), the Tax Commissioner determined that certain store displays, fixtures and showcases became a permanent part of the realty because they were either built into the existing walls or permanently affixed to the ceiling or floor. The two architectural plans presented provide no evidence that the walk-in coolers and freezers were built into the existing walls, nor do such plans indicate that these items were permanently affixed to the floor or wall of the structure. For these reasons and the other reasons previously cited, it is not plainly clear from the evidence presented that the Taxpayer intended that the refrigeration system become permanently attached to the realty. Accordingly, I must conclude that the contested refrigeration system remained tangible personal property after installation. As such, it will remain in the audit.
CONCLUSION
The audit assessment will be revised in accordance with this determination. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Attention: *****, 600 East Main Street, 15th Floor, Richmond, Virginia 23219. For questions concerning payment of the assessment, you may contact ***** at *****.
The audit assessment will be revised in accordance with this determination. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Attention: *****, 600 East Main Street, 15th Floor, Richmond, Virginia 23219. For questions concerning payment of the assessment, you may contact ***** at *****.
Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Linda Foster
Deputy Tax Commissioner
- Linda Foster
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AR/1-3628764215.R
1.Pursuant to Va. Code 58.1-205.1, any tax assessment issued by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is incorrect.
Rulings of the Tax Commissioner