February 2, 2016
Re: § 58.1-1824 Protective Claim for Refund
Dear *****:
This is in reply to your letter in which you submit a protective claim for refund of overpaid sales and use taxes for the period February 2004 through January 2007 on behalf of ***** (the "Taxpayer"). I apologize for the delay in the Department's response.
FACTS
The Taxpayer operates retail grocery stores throughout the United States and in Virginia. As a result of the Department's audit, an assessment was issued on various purchases and sales for which: (i) no tax was charged, (ii) partial tax was charged, and (iii) invalid exemption certificates were accepted to support exempt sales. The Taxpayer takes issue with the tax assessed in three areas: (i) food sold in tins, (ii) the denial of resale exemption certificates, and (iii) charges for maintenance and/or repair services by refrigeration contractors. The Taxpayer has paid the assessment in full and requests a refund of the tax paid based on the issues set out in this appeal.
DETERMINATION
Food Sold in Tins
In this instance, the auditor held taxable at the full 5% tax rate candy and food items packaged in holiday tins on which the Taxpayer collected the reduced 2.5% sales tax rate. The auditor relied on Virginia Tax Bulletin (VTB) 91-11(10/1/99), which states that eligible food packaged with ineligible food, nonfood items, or alcoholic beverages and sold together for a single price do not qualify for the 2.5% sales tax rate. The Taxpayer claims that the tins constitute packaging for eligible food items and, therefore, qualifies for the reduced sales tax rate.
The Food Tax Reduction Program set out in Va. Code § 58.1-611.1 applies a reduced sales and use tax rate to sales of food purchased for home consumption as defined under the federal Food Stamp Act of 1977, 7 U.S.C. § 2012. The reduced tax rate applies regardless of whether the food is sold to an individual or a business. Currently, the reduced food tax rate is 2.5% (1.5% state and 1.0% local). The federal definition includes most staple and grocery food items and cold prepared foods. Virginia Tax Bulletin 05-07 (5/31/05) discusses in detail foods that qualify for the reduced sales tax rate. In addition, the Tax Bulletin specifically addresses eligible food packaged with ineligible food, nonfood items, or alcoholic beverages and sold together for a single price. When packaging ineligible foods, nonfood items, or alcoholic beverages and eligible food items for a single price, the combined package is subject to the general sales tax rate.
In this instance, the holiday tins are not considered a nonfood item packaged with the eligible candy and food items referred to in VTB 91-11 but rather represents the packaging itself. Because the Food Tax Reduction Program applies to the sale of food packaged for home consumption, the candy and food items packaged and sold in tins for a single price qualify for the reduced sales tax rate. Accordingly, the audit will be adjusted to remove the tax assessed on such items. However, any tax assessed on food packaged with ineligible food or nonfood items and sold together for a single price are subject to the general sales tax and will remain in the audit.
Resale Exemption Certificates
The auditor listed in the exceptions all sales that were not supported by a valid certificate of exemption. The Taxpayer provided the auditor resale exemption certificates for several of the sales exceptions in the audit. The auditor removed any sales that were supported by a valid certificate of exemption. The auditor determined that the items remaining in the exceptions were not supported by a valid certificate of exemption and would remain in the audit. The Taxpayer provides with its appeal copies of missing exemption certificates and the certificates denied by the auditor for reconsideration. The Taxpayer claims the certificates denied by the auditor are valid and were denied for minor errors.
Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia. Va. Code § 58.1-623 A provides that:
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.
Virginia Code § 58.1-623 B then states, in part:
The certificate mentioned in this section shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable. Such certificate shall be signed by and bear the name and address of the taxpayer; shall indicate the number of the certificate of registration, if any, issued to the taxpayer; shall indicate the general character of the tangible personal property sold, distributed, leased, or stored, or to be sold, distributed, leased, or stored under a blanket exemption certificate; and shall be substantially in such form as the Tax Commissioner may prescribe.
Title 23 of the Virginia Administrative Code 10-210-280 A interprets Va. Code § 58.1623 and states "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice." [Emphasis added]. Public Document (P.D.) 98-29 (2/20/98) sets out the Department's longstanding policy that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. In such instances, exemption certificates are subject to greater scrutiny by the Department and are acceptable only if the Department can confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during an audit.
In this instance, the exemption certificates are subject to greater scrutiny by the Department because they were not on file at the time of the transaction or the exemption certificate was not completely filled out or illegible. I would note that the auditor removed sales listed in the audit exceptions where the Taxpayer was able to provide a valid exemption certificate. I will address the contested exemption certificates set out in the Taxpayer's appeal.
· Line items 1-3, 44-61. These sales will be removed from the audit because the Department was able to confirm that the sales and use tax exemption certificates are valid and proper for the transactions.
· Line items 4-5 and 10-16. These certificates were missing the date and kind of business engaged in by the dealer. Further review shows that one customer is not registered for the retail sales and use tax and the sales and use tax registration for the other customer was closed prior to the transaction. Accordingly, these exemption certificates are not valid for the transactions and will remain in the audit.
· Line items 4-9. These certificates were missing the date at the time of review and could not be verified as valid certificates at the time of purchase. Research of the customer's account shows that these customers are not registered with the Department for the retail sales and use tax. Accordingly, these exemption certificates are not valid for the transactions and will remain in the audit.
· Line items 17-38. In this instance, the exemption certificate was illegible. A review of the exemption certificate provided by the Taxpayer shows that the customer's exemption certificate is dated two years after the transaction. Further, the Department's records show that the customer registered for sales and use tax in November 2007 and the transaction was in June 2006. According, these transactions will remain in the audit because the exemption certificate was invalid at the time of the transaction.
· Line item 39. The exemption was missing the kind of business engaged in by the dealer. The exemption certificate is not valid in this instance because the customer's retail sales and use tax registration was closed in October 2006 and prior to the transaction. Accordingly, this transaction will remain in the audit exceptions.
· Line items 40-43. The exemption certificate was not on file at the time of the audit. A review of the exemption certificate provided by the Taxpayer shows an invalid registration number and could not be verified as being registered for the retail sales and use tax. Accordingly, these transactions will remain in the audit exceptions.
Repair Parts/Refrigeration Equipment
The auditor deemed the Taxpayer's refrigeration coolers and cases as tangible personal property and assessed the tax on maintenance and repair parts installed by contractors on such equipment. The auditor relied on P.D.s 91-254 (10/8/91) and 10-125 (7/7/10) to support his position that the Department generally treats walk-in coolers and freezers installed in retail establishments as tangible personal property after installation. The Taxpayer claims that the refrigeration equipment is real property and the contractor is liable for the tax on maintenance and repair parts installed on the refrigeration equipment.
In Danville Holding Corp. v. Clement, 178 Va. 223, 232, 16 S.E.2d 345, 349 (1941), the Virginia Supreme Court (the "Court") set forth three general tests to be used in determining whether an article of tangible personal property is a fixture, and thus considered a part of the real estate for purposes of taxation or remains personal property subject to retail sales taxation. The three tests are: (1) the annexation of the chattel (property) 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 parties.
In order for the tests to apply, it is presumed that the property is annexed to the realty in some form. In its decision, the Court noted that the "intention of the party making the annexation is the paramount and controlling consideration." In addition, the Court stated that each fixture case must be decided according to its particular facts and circumstances.
Annexation to the Realty: In order to meet this test, the annexation of the chattel must be actual or constructive. In Danville Holding, the Court concluded "the method or extent of the annexation carries little weight, except insofar as they relate to the nature of the article, the use to which it is applied and other attending circumstances as indicating the intention of the party making the annexation." In other words, so long as chattel is attached to a building to carry out the purpose for which such building was erected and to increase its value for occupation or use, such chattel may become part of the realty even if it may be removed without injury to itself or the building.
Adaptation to use or purpose of the property or realty: Adaptation of chattel to the use of real property to which it is annexed is entitled to great weight. If the attached property is essential to the purposes for which the building is used or occupied, it would generally be considered a fixture even if its annexation to such building is such that it may be severed without injury to either the chattel or the building.
The intention of the parties: The Court has emphasized the intention of the party making the annexation the chief test to be considered in determining whether the chattel has been converted into a fixture. Transcontinental Gas and Pipe Company v. Prince William County, 210 Va. 550, 555 (1970), citing Danville Holding. Although the intention does not need to be expressed in words, it should be able to be inferred from the nature of the property annexed, the purpose for which it was annexed, the relationship of the party making the annexation, and the structure and mode of annexation.
The intention to make a chattel 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. Mullins v. Sturgill, 192 Va. 653 (1951).
The Department has previously addressed the question of real versus tangible personal property in prior rulings of the Tax Commissioner. In P.D. 91-254, the taxpayer specialized in the installation of walk-in coolers and other refrigeration equipment that retained its identity as tangible personal property after installation. While not specifically addressed in the ruling, the walk-in coolers and other refrigeration equipment were installed in restaurants and other types of food establishments that lease or rent the building to conduct their business operation. All of the equipment installed by the taxpayer did not become permanent fixtures and was required to be removed in the event of lease cancellation. Therefore, the intent of the parties in this instance was that the walk-in coolers and other refrigeration equipment remain tangible personal property after installation.
In P.D. 10-125, the taxpayer was a general contractor that entered into a contract with the government to renovate and upgrade a military exchange store that included 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). The Tax Commissioner concluded that it was not plainly clear from the evidence presented of the taxpayer's intent that the refrigeration system became permanently attached to the reality. Therefore, the Tax Commissioner ruled that the refrigeration system remained tangible personal property after installation.
While the above rulings deemed the walk-in coolers and refrigeration cases as tangible personal property, P.D. 94-142 (4/29/94) concluded that a refrigeration system used in a restaurant and furnished by the lessor was a permanent fixture of the realty. In that case, the taxpayer was in the business of operating restaurants and entered into a lease agreement for the operation of two restaurant facilities in Virginia. The lease payments included both the lease of tangible personal property and real property. The terms of the lease provides that the lessee shall have the right to remove or replace any or all equipment, furniture, trade fixtures and furnishings not furnished by the lessor. In that case, the lessor supplied the walk-in coolers and refrigeration cases that were specifically adapted to and used as part of the operation of the restaurants. Based on the terms of the lease, the intent of the lessor was clear that the walk-in coolers and refrigeration cases not be removed by the lessee but become a permanent part of the facilities. In that case, the walk-in coolers and refrigeration cases were deemed real property and not subject to the tax.
In the Taxpayer's case, the refrigeration coolers and cases are connected by a network of refrigerant piping to the same central refrigeration system, which includes large condensers located on the roof of the building and compressors located in a central equipment room located in the store. The refrigerant piping and electrical conduit runs through refrigeration pits below the floor or from drops in the ceiling and is plumbed into the store drainage systems. Moreover, the Taxpayer is the owner of the building and the refrigeration coolers and cases annexed to the building are essential to the Taxpayer's purposes for which the building is used, i.e., the operation of a grocery store. Unlike the refrigeration equipment in P.D. 91-254 and P.D.10-125 where the intent of the taxpayer was either in doubt or the intent was for the refrigeration equipment to remain tangible personal property, the intent of the Taxpayer in this instance is that the refrigeration equipment remains annexed to the building for its useful life.
Based on the foregoing, it is my determination that the installation of the refrigeration coolers and cases satisfies the three-pronged test in Danville Holding. This is consistent with the Tax Commissioner's determination in P.D. 94-142. Therefore, the refrigeration coolers and cases are deemed real property fixtures upon installation. As such, the contractor is liable for the tax on the cost price of repair parts used in the maintenance and repair of the refrigeration equipment as set out in Va. Code § 58.1-610 A. The assessment will be adjusted to remove the tax assessed on repair and maintenance parts installed by the contractor on such refrigeration equipment.
It is my understanding that some of the Taxpayer's locations have small refrigeration cases (i.e., wine and floral cases) that have self contained refrigeration units that are not connected to the central refrigeration system. These small refrigeration cases are not attached to the walls or permanently affixed to the ceiling or floor and remain tangible personal property after installation. Accordingly, any tax assessed on repair and maintenance parts installed by contractors in connection with such refrigeration cases is taxable and will remain in the audit.
CONCLUSION
The audit will be revised in accordance with this determination and the Taxpayer will receive a revised audit report. Because the assessment is paid, the overpaid amount will be refunded to the Taxpayer as soon as practical. The refund will include refund interest in accordance with Va. Code § 58.1-1833.
The Code of Virginia sections, regulation and public documents cited, along with other reference documents, 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 about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5202213824.T