May 11, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period April 2008 through June 2013. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an electrical contractor that was audited by the Department. During the period audited, the ***** (the "City") awarded the Taxpayer contracts to upgrade the electric lighting at various City facilities to a more energy efficient type. The City provided the Taxpayer with a government exemption certificate, Form ST-12, and advised the Taxpayer to claim the sales and use tax exemption for state and local governments on purchases made pursuant to the contracts. The Taxpayer paid sales taxes on some of its contract purchases from one vendor. The City subsequently requested refunds of the sales taxes paid to the vendor by the Taxpayer on these purchases. The Taxpayer obtained sales tax refunds from the vendor and credited the refund amounts on the City's final contract billing. The Taxpayer also made some untaxed purchases from the same vendor. The Department assessed consumer use taxes on these untaxed purchase transactions, as well.
The Taxpayer maintains that the Department's audit assessment is erroneous and requests the abatement of the tax and interest assessed on the contested purchases. The Taxpayer's appeal is based on several issues, each of which is addressed in this determination.
DETERMINATION
Valid Exemption Certificate Accepted
The Taxpayer asserts that it accepted a valid Form ST-12 issued by the City. The City instructed the Taxpayer to provide the exemption certificate to suppliers when purchasing job materials used to perform the contract work for the City. The Taxpayer states that it was relieved of the duty to remit sales or use taxes and that the City assumed responsibility to remit the sales or use taxes due on the contract purchases by issuing the valid Form ST-12. The Taxpayer states that it has met the burden of proof standard for the acceptance of exemption certificates as set out in Va. Code § 58.1-623 A, which states:
All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.
The Taxpayer further notes that the City's purchasing department created a reasonable expectation that it possessed the necessary expertise and agency with regard to the tax matters related to the contract. As such, the Taxpayer assumed the City's representative was authorized to issue the Form ST-12, and it was provided the correct information and instructions for the use of the exemption certificate.
In this case, there is no dispute that the Taxpayer is a real property contractor. The application of Virginia sales and use taxes to real property contractors is set out in detail in Title 23 of the Virginia Administrative Code (VAC) 10-210-410. Subsection A discusses the basic rules for contractors and states "the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts." Subsection A further states, in part, "[n]o sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency ...." The regulation clearly states that contractors are generally considered the taxable users or consumers of purchases made to perform real property construction projects.
Further, Form ST-12 is an exemption certificate for exclusive use by governmental entities, such as the City, to make exempt purchases from retail vendors. The Taxpayer is not a retailer with respect to its contract work nor is it a governmental entity. Thus, the Taxpayer is not authorized to use Form ST-12 to make exempt purchases. While the City is authorized to make exempt purchases with Form ST-12, the pass-through of the City's sales tax exemption to a third party is prohibited. The good faith protection afforded to dealers that accept valid exemption certificates is not applicable in this situation because the Taxpayer is a real property contractor
rather than a retailer. There is no good faith protection available in cases where a real property contractor accepts a Form ST-12 from a governmental entity because the contractor is the taxable user of any purchases of tangible personal property made to fulfill the contract.
The Taxpayer should also note that the City's purchase orders for the jobs at issue state that the contracts are subject to the provisions of the Commonwealth of Virginia Vendors Manual. Section 5.8 of the manual addresses taxes. Subsection d states that persons who enter into real property construction contracts with a governmental entity are not entitled to the sales and use tax exemption for governmental entities.
Defective Form ST-12
The Taxpayer contends that the Department's Form ST-12 is defective because it contains no instructions that real property contract services are not covered by the wording of the exemption certificate. The Taxpayer compares the Form ST-12 to the Department's resale exemption certificate, Form ST-10, to illustrate its contention. Form ST-10 contains specific language stating that the exemption certificate cannot be used by using or consuming construction contractors as defined in the Department's regulations. Form ST-12 contains no such wording, and the Taxpayer states that it was justified in relying on the City's instruction to use the exemption certificate to make exempt purchases of materials for the contract work performed.
The Taxpayer is correct that there is no wording on Form ST-12 that specifically prohibits the form's use by real property contractors. However, various language on the Form ST-12 clearly limits the form's use to governmental entities. The exemption certificate states at the top of the form that it is "[f]or use by the Commonwealth of Virginia, a political subdivision of the Commonwealth of Virginia, or the United States." Form ST-12 also states that the Virginia sales and use tax does not apply to tangible personal property used or consumed by the state of Virginia, political subdivisions of Virginia or the United States. Finally, Form ST-12 states the following:
The undersigned, for and on behalf of the governmental agency named below, hereby certifies that all tangible personal property purchased or leased from the above named dealer on and after this date will be for use or consumption by a governmental agency, that each such purchase or lease will be supported by the required official purchase order, and that such tangible personal property will be paid for out of public funds .... (Emphasis added.)
The Tax Commissioner has addressed this issue in a number of prior determinations. For example, Public Document (P.D.) 04-109 (9/14/04) discusses an electrical contractor that was assessed use tax on purchases made with respect to contracts with a government agency and a state university. The contractor was provided a Form ST-12 by each client and made purchases of tangible personal property for the contracts exempt of the tax based on the clients' representations. The Tax Commissioner determined that the contractor was properly assessed the tax because the government exemption did not apply to purchases made for use or consumption by the contractor. See also P.D. 03-75 (10/27/03) and P.D. 11-128 (7/6/11).
In this case, the Taxpayer used Form ST-12 to make exempt purchases for its use or consumption. The Taxpayer was not a government entity that used and consumed the items purchased. Further, the Taxpayer did not sell tangible personal property to the City but instead provided real property construction services to the City. In accordance with the cited authorities, the assessment is correct.
Pollution Control Exemption
The contract work performed by the Taxpayer was paid for using grants created by the American Recovery and Reinvestment Act of 2009. The grants were awarded to the City for the purpose of reducing its carbon foot print. The Taxpayer submits that it was directed by the City not to pay sales taxes on the contested purchases based on authorization from the Department of Energy, which is the federal agency that administered the grant program. Because the contract work was related to energy conservation efforts that were administered through the Department of Energy, the Taxpayer states that the contested purchases qualify for the pollution control equipment and facilities exemption in Va. Code § 58.1-609.3 9. This sales and use tax exemption applies to "certified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section." (Emphasis added.)
Virginia Code § 58.1-3660 B, which was cited by the Taxpayer but is not the actual sales tax exemption statute, provides that certified pollution control equipment and facilities include:
Any property, including real or personal property, equipment, facilities, or devices, used primarily for the purpose of abating or preventing pollution of the atmosphere or waters of the Commonwealth and which the state certifying authority having jurisdiction with respect to such property has certified to the Department of Taxation as having been constructed, reconstructed, erected, or acquired in conformity with the state program or requirements for abatement or control of water or atmospheric pollution or contamination.
The state certifying authorities referenced are also set out in Va. Code § 58.1-3660 B. Based on the exemption and definition statutes cited, the Taxpayer's purchases do not qualify for the pollution control exemption. The Taxpayer has not presented evidence that the property purchased was certified to the Department of Taxation by a state certifying authority.
Department of Energy
The Taxpayer also contends that the jobs at issue are exempt on the basis that the Department of Energy authorized the federal grant money for the contract work, which was paid for with federal funds. The Department's policy with respect to real property contractors applies equally to contractors that perform jobs pursuant to federal government contracts. Title 23 VAC 10-210-410 J discusses the application of the tax to government contractors and states:
Generally, purchases of tangible personal property by contractors in connection with real property construction contracts with the governments of Virginia or the United States or political subdivisions thereof, are sales to such contractors for their own use or consumption and contractors are subject to the tax on such transactions. This applies regardless of whether title to such property passes directly to the governmental entity upon purchase by the contractor or if the contractor is reimbursed directly by the government entity for the cost of such property.
Consistent with the Department's position in this determination with respect to the City, the Department of Energy did not purchase, use or consume the materials that are at issue. The purchases were made by the Taxpayer for its use or consumption in the performance of real property contract work and do not qualify for exemption.
CONCLUSION
The audit assessment is correct and the outstanding balance remains due and payable. The Taxpayer will be issued an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5790791041.S