Rulings of the Tax Commissioner

December 13, 2024

Re:    Request for Ruling: Retail Sales and Use Tax
     
Dear *****:

This is in response to your letter submitted on behalf of your client (the “Taxpayer”) requesting a ruling on the application of the retail sales and use tax on the sale and installation of its products. 

FACTS

The Taxpayer, a manufacturer of venetian blinds, window blinds, and other related products, sells its inventory to customers both online and at its retail stores. The Virginia retail locations are showrooms where customers view products, confer with sales personnel, and place orders. The Taxpayer, in addition to the operation of retail locations in Virginia, provides installation of product purchases through an unrelated third party. Once a purchase is made, orders are sent to one of the manufacturing locations and the inventory is shipped to the store for pickup by the customer or the installer for home installation. The Taxpayer poses a number of questions regarding the application of the Virginia retail sales and use tax on the sale and installation of products within Virginia. The questions are addressed separately below.

This ruling is based solely on the facts as provided by the requester and summarized above. Any change in facts or the introduction of new facts may lead to a different result. 

RULING

Virginia Tax Bulletin (VTB) 17-8 (6/29/2017), issued as Public Document (P.D.) 17-139, addresses a law change (2017 Acts of Assembly, Chapters 436 and 449), effective July 1, 2017 that repealed a provision of Virginia law that required dealers making both retail sales and also installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings, cabinets, countertops, kitchen equipment, window air conditioning units, or other like or comparable items to collect the tax as dealers from customers for such transactions. Under VTB 17-8, dealers that sell and install the items listed that become real property after installation are considered to be consuming contractors that are treated as consumers of all tangible personal property used for such installation. 

In accordance with the law change, dealers that sell and also install the listed items are required to either pay the sales tax for inventory and supplies at the time they purchase those items from their supplier or vendor or, if such dealer was not or could not be certain whether the item would be sold with or without installation at the time of purchase, they must accrue use tax on such items instead. The law change applies whether a dealer installs the items itself or contracts the installation work to another entity. As such, the use of an outside installer alone would not reclassify an installation transaction as a retail sale for the purposes of the new law. 

Question 1

Would the Taxpayer, as the seller and installer of blinds and blind-related products from Virginia retail locations, accrue and remit use tax on the blind products as opposed to charging and collecting Virginia sales tax on separately stated price for the blinds and blind related products?

In accordance with VTB 17-8, the Taxpayer would be considered to be a consuming contractor for transactions including the installation of blinds and blind related products. Title 23 of the Virginia Administrative Code (VAC) 10-210-410 D requires using or consuming contractors to pay the tax at the time they purchase raw materials or accrue and remit the consumer’s use tax to the Department. As a consuming contractor, the Taxpayer would be required to either pay the sales tax on the cost price of raw materials it uses to manufacture or accrue and remit the use tax on any tangible personal property included in conjunction with an installation transaction. The Taxpayer would not charge and collect Virginia sales tax on the separately stated price for blinds and blind related products included in installation contracts. 

Question 2

If the Taxpayer must accrue use tax, would the proper measure of the use tax be the cost price of each item including materials and labor costs to produce the blinds, but excluding the subsequent installation labor?

Virginia Code § 58.1-602 defines “cost price” to mean “the actual cost of an item or article of tangible personal property computed… without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever.” 

Absent a statutory exemption, labor or service charges are taxable when made in connection with the sale of tangible personal property. Furthermore, any entity that withdraws tangible personal property from inventory for use and consumption in the performance of real property construction contracts is liable for the tax based on the fabricated cost price of the tangible personal property withdrawn. The fabricated cost price is computed by totaling the cost of materials, labor, and overhead incurred in the manufacturing or fabricating process. Freight inward to the plant is also treated as an element of the cost of the materials. Based on facts as described, the Taxpayer’s cost would include the materials and labor costs expended to manufacture the various blinds and related items that are sold and installed, including any freight and handling costs expended to deliver the inventory to the Virginia retail stores. See Title 23 VAC 10-210-560 B.

As for the subsequent installation labor, Virginia Code § 58.1-609.5 2 provides an exemption from the retail sales and use tax for “[a]n amount separately charged for labor or services rendered in installing, applying, remodeling, or repairing property sold or rented.” Based on the description of the Taxpayer’s activities, installation labor would be separated from the activity of fabricating or manufacturing tangible personal property and would not be included in the fabricated cost price.

Question 3

For those blinds which the Company does not install, but simply sells, should sales tax be collected from its customers on the selling price?

In accordance with VTB 17-8, a dealer who principally fabricates tangible personal property for sale to customers for use or consumption by such customers, is required to add the sales tax to the sales price and collect it from the customer and remit such collections over to the Department. See Title 23 VAC 10-210-410 C. Such dealers must register with the Department for the collection and payment of the tax. Likewise, the Taxpayer would be required to register, collect, and remit sales tax on the retail price of the products it sells.

The facts presented indicate the Taxpayer would be operating in a dual capacity. In this circumstance, the primary purpose rule would apply as follows:

•    If most of the gross receipts result from the Taxpayer’s sales or resales, it would purchase materials exempt from tax by submitting an appropriate exemption certificate to its vendors and would collect and remit the tax based upon the total amount for which the blinds and blind related products are sold. When the Taxpayer withdraws blinds and related products from inventory for use and consumption in the performance of real property construction contracts, it would accrue the tax based on the fabricated cost price of the inventory withdrawn and remit the use tax with its sales and use tax return. 

•    If most of the gross receipts result from fabricating blinds and blind-related products for its own use and consumption in real property construction, the Taxpayer would pay sales tax on all materials at the time of purchase to all suppliers that are authorized to collect the tax. In addition, the Taxpayer would also be required to register, collect, and pay the tax on the retail selling price of the blinds sold regardless of whether tax had already been paid to a supplier. The Taxpayer would be permitted to purchase exempt from the tax only those materials that could be identified at the time of purchase as purchases for resale.

•    If the primary purpose cannot clearly be determined based on gross receipts or the purchases are made under circumstances for which the determination of the manner in which such purchases would be used is impossible at the time of sale, the Taxpayer may apply to the Department to pay any tax directly without paying tax to suppliers. See Title 23 VAC 10-210-510 concerning direct payment permits.

The Taxpayer will need to analyze its gross receipts and inventory practices to decide whether it is principally a retailer or a contractor. Once this decision is made, it will need to ensure it is appropriately registered with the Department and collect or accrue and remit the tax in accordance with the policies enumerated above. In the alternative, the Taxpayer may be able to apply to the Department for a direct pay permit. If approved, the Taxpayer would file a Virginia Direct Payment Permit Sales and Use Tax Return (currently Form ST-6).

The Code of Virginia sections cited, along with other reference documents, are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy and Legislative Affairs, Sales Tax Adjudication, at *****. 

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/3522.F