June 8, 2017
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 consumer use tax assessment issued to ***** (the “Taxpayer”) for the period July 2013 through June 2016. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a real property contractor. The Department audited the Taxpayer and assessed consumer use tax on untaxed labor charges billed in connection with the purchase of fabricated construction materials. The labor charges include shop drawings, administrative fees, custom gel coat and tooling. The Taxpayer accrued and remitted to the Department the consumer use tax due on the cost of the materials billed by the fabricator. There was no consumer use tax paid on the separately stated labor charges billed in connection with the fabricated job materials. The Department's auditor assessed the consumer use tax on the labor charges on the basis that the charges were part of the taxable cost price of the construction materials purchased by the Taxpayer.
The Taxpayer contests the assessment of consumer use tax on the separately stated labor charges billed by the fabricator. As the audit assessment was paid in full, the Taxpayer seeks a refund of the tax and interest paid on the labor charges held taxable in the audit.
DETERMINATION
Virginia Code § 58.1-610 A states, in part, that “[a]ny person who contracts orally, in writing, or by purchase order, 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, shall be deemed to have purchased such tangible personal property for use or consumption.” Pursuant to Va. Code § 58.1-604, a use tax is imposed “upon the use or consumption of tangible personal property in this Commonwealth ....” The use tax is computed on the cost price of each item or article of tangible personal property used or consumed in the state. “Cost price” is defined in Va. Code § 58.1-602 to be “the actual cost of an item or article of tangible personal property computed in the same manner as the sales price as defined in this section without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever.”
As a real property contractor, the Taxpayer must pay the sales tax at the time of purchase on construction materials, tools and equipment for its use or consumption in the performance of real property contract work. In the event the sales tax is not charged by a vendor, the Taxpayer is responsible for accruing and remitting to the Department the applicable use tax on the untaxed cost price of the property purchased. The Taxpayer did, in fact, report and pay use tax to the Department on the cost of the materials billed by the fabricator in the transaction that is contested. However, the use tax was not computed and remitted on the labor charges.
Based on the authorities cited, the taxable cost price of the construction materials properly includes the charges for shop drawings, administrative fees, custom gel coat and tooling. This is true regardless that the charges are separately stated on the invoice or record of the sale. The Department's position is further supported by Title 23 of the Virginia Administrative Code 10-210-4040, which states that any service included in or in connection with the sale of tangible personal property is considered taxable. The only exceptions to this policy are those labor or service charges that have statutory exemptions from the tax. Examples of exempt charges include separately stated transportation and delivery services, repair labor and installation labor. Virginia Code § 58.1-609.5 sets out the exemptions for these types of charges.
The Taxpayer should further note that the labor to fabricate tangible personal property is a taxable labor charge based on the statutory definition of “sale” in Va. Code § 58.1-602. It appears that the contested gel coat charge may also be considered taxable fabrication labor. Regardless, none of the contested charges enjoy a statutory exemption from the tax and were properly assessed in the audit.
CONCLUSION
The Department's records indicate that the Taxpayer has paid the contested assessment in full. There is no basis to refund the Taxpayer's payment of the tax and interest assessed on the contested labor charges.
The Code of Virginia sections and regulation 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 concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1101.S