November 16, 2017
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on the application of the Virginia retail sales and use tax to the business operations of ***** (the “Taxpayer”). I apologize for the delay in responding to your request.
FACTS
The Taxpayer is an engineering and consulting firm that sells and services scientific instrumentation used to measure water flow for waste water and water systems. The instrumentation consists of flow meters, sensors, recorders and accessories. The Taxpayer's sales are primarily made to government-owned and private utility companies. Most of the instrumentation sold by the Taxpayer is attached to existing structures that may be classified as real property. The Taxpayer provides services related to the instrumentation that consist of installation, repair, maintenance, calibration and customer training. The Taxpayer's charges for the services are either separately billed to the customer or separately stated on its invoices for sales of the instrumentation.
The Taxpayer seeks a ruling to address whether the business is classified as a retailer or a real property contractor with respect to the sale, installation and servicing of the water flow scientific instrumentation. The Department's ruling will determine if the Taxpayer should be registered to collect and remit the Virginia retail sales tax on the sale of the instrumentation and the services it provides.
RULING
Real Property Contractors
Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A provides that:
A contractor is defined as any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon, including highways, and in connection therewith to furnish tangible personal property, whether such person be a prime contractor or a subcontractor. Unless otherwise noted, 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.
The regulation states that tangible personal property that is incorporated into real property is considered to be used or consumed by the contractor. Generally, sales and leases of tangible personal property to contractors are taxable because contractors are the users or consumers of all tangible personal property furnished to them or by them in connection with real property construction, installation, repair and similar contracts. As such, contractors cannot claim the resale exemption on such purchases or leases of property.
Real Property Versus Tangible Personal Property
In determining whether tangible personal property remains tangible or becomes real property upon installation, the Department relies on the Virginia Supreme Court's ruling in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), which states that:
Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They 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 property is connected is appropriated, and (3) the intentions of the parties. The intention of the party making the annexation is the chief test to be considered....
In accordance with the Virginia Supreme Court's decision, the Department places great emphasis on the intention of the parties making the annexation in determining whether the annexed property remains tangible personal property or becomes real property upon installation.
The Taxpayer states that the instrumentation it installs is largely affixed to structures that are considered real property. The useful lives of the structures typically exceed 15 years. Based on this information, some, but not all, of the instrumentation installed by the Taxpayer likely becomes annexed to, or part of, the realty. For this reason, the three tests set out in Transcontinental Gas Pipe Line Corporation must be used to determine the proper application of the sales and use tax on a case by case basis. Public Documents 99-54 (4/7/99), 00-158 (8/25/00) and 15-80 (4/22/15) are instructive with respect to determining if tangible personal property remains tangible or becomes part of the realty upon its installation.
Real Property Contracts
In cases where the tangible personal property installed by the Taxpayer is affixed to real property, is essential to the purpose for which the real property is used, and it is the intent of the parties that the property remain part of the real property for the useful life of the real property, the Taxpayer would be considered a using and consuming contractor. As such, the Taxpayer would be liable for the sales or use tax on the cost price of the instrumentation, materials, supplies and other property purchased and installed for real property jobs. If suppliers to not charge the tax on purchases for the Taxpayer's use or consumption, the applicable amount of consumer use tax should be accrued and remitted to the Department by the Taxpayer. The services provided by the Taxpayer in connection with real property contracts, i.e., installation, calibration, repair and maintenance and customer training, would be exempt real property services.
Retail Sales of Tangible Personal Property
If the sale and installation of tangible personal property does not meet all three of the tests set out in Transcontinental Pipe Line Corporation, the transactions are considered the sale of tangible personal property. Title 23 VAC 10-210-410 B provides that a using and consuming contractor may also engage in the business of selling tangible personal property to customers and other contractors. In such cases, the Taxpayer is required to register with the Department and collect and remit the sales tax on the sales price of the property it sells at retail. Likewise, the sale of instrumentation or equipment without the provision of installation services is a taxable retail sale. The Taxpayer may purchase the tangible personal property that is sold at retail by issuing suppliers a resale exemption certificate, Form ST-10. Further, retail sales to government entities are exempt from the tax, provided the government entity provides the Taxpayer with a valid Form ST-12. Generally, the government exemption does not apply to real property contract work performed by the Taxpayer.
Separately stated or separately billed service charges in connection with retail sales of the instrumentation are generally taxable pursuant to Title 23 VAC 10-210-4040 A, which provides that “[c]harges for services generally are exempt from the retail sales and use tax. However, services provided in connection with sales of tangible personal property are taxable.” The Taxpayer should note that certain services are exempt from the tax pursuant to Va. Code § 58.1-609.5. Charges billed for installation labor and repair labor, when separately stated, qualify for exemption from the tax. If the Taxpayer sells and installs or repairs tangible personal property that does not become real property upon installation or is not part of the real estate, charges for the installation or repair labor associated with the sale qualify for exemption. Such charges must be separately stated on the bill or record of the sale.
CONCLUSION
Based on the information provided, the Taxpayer appears to operate in a dual capacity as a real property contractor and as a retailer of tangible personal property. The Virginia retail sales and use tax treatment of the Taxpayer's jobs should be based on the nature of the job as determined by applying the tests from Transcontinental Pipe Line Corporation discussed above.
This ruling is based on the facts as presented in your letter and summarized above. Any changes in facts or the introduction of new facts may lead to a different result.
The Code of Virginia section and regulations cited, along with other reference documents, are available online at vvww.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this ruling response, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1027.S