Tax Type
Retail Sales and Use Tax
Description
Contractors fabricated costs; Use tax
Topic
Taxability of Persons and Transactions
Date Issued
12-11-1985
December 11, 1985
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of August 19, 1985, in which you submit an application for correction of sales and use tax assessed to ***** as the result of a recent audit.
FACTS
***** ("Taxpayer") is engaged in the fabrication of steel both for its own use in real estate construction contracts and for sale to other consumers. Although primarily fabricating steel for sale to others during the period covered by a recent audit, the taxpayer, for purposes of the primary purpose test set forth in Section 630-10-27.E of the Virginia Retail Sales and Use Tax Regulations, treated itself as a business fabricating steel primarily for its own use. Accordingly, tax was assessed to the taxpayer on the fabricated cost price, rather than raw material cost, of the materials used by the taxpayer in its real estate construction contracts.
The taxpayer contests the assessment issued it, asserting that it indeed operated in accordance with the primary purpose test, having determined in 1973 that it was primarily engaged in fabricating products for its own use in real estate construction contracts.
DETERMINATION
Section 63O-10-27.E of the Virginia Retail Sales and Use Tax Regulations provides that any person who primarily fabricates tangible personal property for sale or resale and "who withdraws tangible personal property from inventory" for his own use in real estate construction contracts "is liable for the tax on the fabricated cost price of the tangible personal property withdrawn."
Under the primary purpose test based upon gross receipts, also set forth in Regulation Section 630-10-27.E, the taxpayer fabricated goods primarily for sale or resale, thus the tax due on goods withdrawn from inventory for the taxpayer's own use was properly computed based upon the fabricated cost price of the goods. Contending that it had consistently operated on the basis of a 1973 analysis of its gross receipts, showing the taxpayer to be primarily engaged as a real estate construction contractor, the taxpayer contests such assessment. I disagree, for it is implicit in Regulation Section 630-10-27.E that the application of the tax will vary depending upon the nature of a fabricator's gross receipts for any given period. A fabricator like the taxpayer must exercise due caution in determining the correct application of the tax by periodically computing its gross receipts attributable to sales and real estate construction. Ideally, a fabricator like the taxpayer should annually determine the nature of its gross receipts and apply the results of its primary purpose test on a prospective basis.
Based upon the foregoing, the assessment issued to the taxpayer must be deemed correct. However, basis may exist on other grounds for the relief of a portion or all of the assessment, provided that substantiating information is submitted by the taxpayer. The possible basis for relief is revealed when subsection E of Regulation Section 630-10-27 is read in light of the entire regulation. Subsection B provides that a person fabricating property both for sale and for his own use "may not purchase under a resale exemption certificate any tangible personal property which he knows at the time of purchase will be furnished by him in connection with any specific contract." Thus, steel and other raw materials for fabrication that are purchased for a specific real estate construction contract are taxable only on their purchase price; however, the fabricated cost price concept will continue to apply when materials are purchased in bulk for fabrication into products both for the taxpayer's own use and for sale to other consumers.
Please advise within the next sixty days if the taxpayer's purchases for use in real estate construction contracts were segregated from its purchases for use in fabricating products for sale. If so, appropriate revisions will be made to the assessment at that time.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner