October 23, 2024
RE: § 58.1-1821 Refund Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period October 2019 to September 2022.
FACTS
The Taxpayer, a fabricator and supplier of steel, rebar, and accessories, forms raw materials into various steel products pursuant to customer order specifications. The products are then moved to another location onsite where the rebar tying is completed by an independent contractor.
An audit resulted in the assessment of sales tax on untaxed labor and service charges, including rebar tying and shop drawings, in connection with the sales of fabricated tangible personal property. The Taxpayer filed an application for correction, contending the disputed charges are not taxable services.
DETERMINATION
Fabrication - Retailer vs. Contractor
The Taxpayer asserts that it fabricates tangible personal property exclusively for use and consumption in real property construction contracts and, thus, is only required to pay tax on the cost price of raw materials used in fabrication, but not tax on the cost of labor or services provided in connection with a sale.
Title 23 of the Virginia Administrative Code (VAC) 10-210-410 C addresses the tax application for fabricators that sell tangible personal property to customers. The regulation states “A person who fabricates tangible personal property and sells it to customers, including contractors, for use or consumption by them, must add the sales tax to the sales price and collect it from the customer for payment to the state. Raw materials, component parts, and other tangible personal property to be fabricated for sale may be purchased under a resale certificate of exemption.” [Emphasis added.]
Title 23 VAC 10-210-560 B provides that a fabricator regularly engaged in the retail sale of fabricated tangible personal property must collect and pay the tax on the sales price of the property. Contrary to the Taxpayer’s assertion that it is a fabricator exclusively for use and consumption in real property, it admits it does not actually perform installation into real property. Instead, the fabricated tangible personal property is sold to various contractors and pre-castors. As the fabricator and seller, the Taxpayer is a dealer that makes retail sales and not the ultimate consumer of the tangible personal property.
Fabrication Cost
The Taxpayer further asserts that installation and rebar tying labor is performed by a third party pursuant to an independent contractor agreement, which is a service separately stated on its invoices. It believes imposing the tax on such services would subject the same materials to the sales and use tax twice.
Title 23 VAC 10-210-560 A defines fabrication as "[a]n operation which changes the form or state of tangible personal property." In this case, the Taxpayer is the dealer of the fabricated rebar. The Virginia retail sales and use tax is imposed on the sales price of tangible personal property. Virginia Code § 58.1-602 defines “sales price” as “the total amount for which tangible personal property or services are sold, including any services that are a part of the sale ... without deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.” This definition makes it clear that, absent a statutory exemption in the Code of Virginia, labor or service charges are taxable when made in connection with the sale of tangible personal property. Further, Title 23 VAC 10-210-560 B states that “the tax applies to the total charge for the fabrication of tangible personal property on a special order for consideration, including labor, even if charges for labor are separately stated.”
The information provided shows that a third-party contractor is utilized for pre-tying and tying of rebar and the Taxpayer invoices for the services in connection with the sale of tangible personal property. Likewise, separately stated charges for shop drawings, regardless as to whether they were tangible personal property or a service, would also be connected to the sales of the fabricated rebar.
In accordance with Title 23 VAC 10-210-560, charges for rebar tying and shop drawings are subject to taxation when made in connection with a retail sale even if separately stated. Double taxation is not occurring on the materials, but the tax is applicable on the total charge including labor charges by the sub-contractor and for the shop drawings. See Public Document 97-159 (4/8/1997).
Under such circumstances, charges and fees for shop drawings and the separately stated rebar tying labor charge would be subject to the sales tax. Therefore, no basis exists to refund the Taxpayer’s payment of tax and interest on the contested services and labor charges.
Based on this determination, the assessment is correct. A revised bill for the remaining balance, with interest accrued to date will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR\4658.F