Tax Type
Retail Sales and Use Tax
Description
Materials resold to customers not permanently affixed to the real property may be purchased exempt
Topic
Exemptions
Government Contractor
Sale for Resale
Taxable Transactions
Date Issued
06-12-2014
June 12, 2014
Dear *****:
This is in response to your ruling request on behalf of ***** (Contractor) in which you question whether the purchase of furniture, fixtures, and equipment (FFE) from ***** (Subcontractor) pursuant to a contract modification issued by the federal government is subject to the Retail Sales and Use Tax.
FACTS
The Contractor, a real property contractor, was awarded a firm fixed price contract totaling over $50 million from a federal government agency (the Agency) to design, renovate, and construct certain facilities in Virginia. The contract specified a completion date, but contained additional Contract Line Item Numbers (CLINs) granting the Agency the discretion to request add-ons to the contract at a later date. One such CLIN granted the Agency the option of acquiring FFE for the project totaling almost $9 million through the Contractor, or procuring these items under a separate contract with a furniture vendor.
Subsequently, although the Agency had reached an agreement with the Subcontractor to furnish and install the FFE, the Agency issued a contract modification obligating additional funding in excess of $10 million for the Contractor to provide for the procurement, delivery, and installation of furniture, fixtures, and equipment for the project. Thus, the modification effectively assigned the already negotiated arrangement to the Contractor with express instructions to award the FFE subcontract to the Subcontractor. Additionally, the modification extended the completion date for the project to August 22, 2011.
The FFE delivered consisted of modular office panels, freestanding office furniture and chairs, shelving, file cabinets, power strips, and similar items found in typical office settings.
As discussed below, the Subcontractor and Contractor may procure the FFE exempt of the Retail Sales and Use Tax as an exempt sale for resale. Further, the contractor's sale to the Agency will qualify for the governmental exemption.
ANALYSIS
Va. Code § 58.1-610 provides the basic rules and application of the tax to contractors engaged in real property construction. Subsection A of Va. Code § 58.1-610 provides:
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- Any person who contracts...to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property... to have purchased such tangible personal property for use or consumption. Any sale, distribution, or lease to or storage for such person is deemed a sale, distribution, or lease to or storage for the ultimate consumer and not for resale."
Subsection D further provides that tangible personal property incorporated in real property construction which loses its identity as tangible personal property is deemed to be tangible personal property used or consumed "within the meaning of this section." Further, subsection E provides in part, "nothing in this section shall be construed to ...affect or limit the resale exclusion provided for in this chapter."
Subsection 4 of Va. Code § 58.1-609.1 provides an exemption from the Retail Sales and Use Tax for "tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States."
Under Va. Code § 58.1-610, a real property contractor's purchase of tangible personal property that will be incorporated into real estate is deemed a sale to the ultimate consumer, and not a sale for resale by the contractor. However, if the materials are actually resold to customers and do not become permanently affixed to the real property, the contractor may purchase such materials exempt of the tax pursuant to the sale for resale exemption. For example, in Public Document ("PD") 87-210 (09/15/87), a real property construction contractor was deemed a consumer subject to the sales and use tax of modular buildings permanently affixed to real estate, but was deemed an exempt retailer with respect to wall pictures, furniture, and similar items of tangible personal property it provided to its Virginia customers in connection with its installation of the modular buildings, because these items did not become permanently affixed to the buildings. As a retailer, the contractor could purchase such items exempt of the sales and use tax.
While the furniture and other freestanding items in the instant case are provided in connection with a contract for the construction of real property, the items will not be incorporated into or permanently affixed to the real property. As explained above, the Contractor and Subcontractor may purchase the FFE exempt of the Retail Sales and Use Tax under the sale for resale exemption. Please note, however, that the resale exemption does not extend to any construction materials or other tangible personal property that will be incorporated into real property, such as concrete, wiring, cabling, nuts, bolts, anchors, screws, nails, glue, or other such materials.
Although the letter requesting this ruling relies heavily upon the government contractor regulation, Title 23 Virginia Administrative Code § 10-210-693, as the rationale for exempting the items at issue, the special application of the true object test provided for in the regulation does not apply to real property construction contracts. However, neither does it override the provisions of Va. Code § 58.1-610 and 23 VAC10- 210-410 that materials that a contractor resells to customers that do not become permanently affixed to the real property may be purchased exempt of the tax using the sale for resale exemption. Likewise, the provisions of 23 VAC10-210-693 do not restrict the Agency from purchasing FFE from the Contractor or Subcontractor exempt of the Retail Sales and Use Tax pursuant to the government exemption set forth in Va. Code § 58.1-609.1(4).
CONCLUSION
I hope this has responded to your inquiry as to the tax implications of this transaction. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia, and Virginia Administrative Code provisions cited, along with other reference documents, are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department's website. If you have any questions about this determination, you may contact ***** Director of the Department's Policy Development Division at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
Rulings of the Tax Commissioner