Tax Type
Retail Sales and Use Tax
Description
Mobile and modular home erection materials
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
01-03-1986
January 3, 1986
Re: 58.1-1821 Application/Sales and Use Tax
Dear ****************
This will reply to your letters of December 13, 1984 and March 4, 1985, in which you submit an application for correction of sales and use tax assessed to ********* as a result of an audit for the period from September 1978 to March 1981.
First, I wish to apologize for the confusion apparently surrounding the department's audit of your corporation. I hope that this letter will clarify this matter for all involved.
In a letter to you from the department dated July 26, 1984, it was erroneously stated that the department's assessment resulted from the erroneous collection of a four percent sales tax or "factor" from customers for whom your corporation erected modular homes. A thorough review of the department's records indicates, however, that the assessment was based upon the failure of your corporation to include the factor in the base for computing its use tax liability on erected modular homes. At the time your corporation received its direct payment permit from the department, it was agreed that the use tax on raw materials used in erected modular homes would equal sixty percent of the "sales invoice amount" charged to each customer. As the factor was included in the price charged to customers on their purchase invoices, tax was properly assessed based upon your prior agreement.
While your corporation did not remit the use tax on its direct payment permit exactly as promised, I find basis for the relief of this assessment based upon information presented to the department during a July 17, 1985 meeting. From the sample costing sheets and specification sheets provided to us during that meeting, it is apparent that the properly taxable cost price of the raw materials used in erected modular homes equalled sixty percent of the "marked up" price of the materials before the addition of the factor. Thus, the collection of tax on the factor, although proper under your agreement with the department, would result in the collection of more tax than is properly due. Accordingly, the tax and interest paid by your corporation will be refunded and the balance of the assessment will be abated, to the extent that the amounts paid and the outstanding balance relate to this issue.
I understand that another audit of your corporation is about to be completed and that the remittance of tax on materials used in erected homes is again being questioned. I have enclosed a copy of Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations which sets forth the department's policy with respect to firms like yours which fabricate tangible personal property both for sale or resale and for their own use in performing real estate construction contracts. This regulation provides that such firms-are to follow a primary purpose rule based upon gross receipts in determining the correct application of the tax when articles are withdrawn from inventory for use in real estate construction. When a firm is engaged primarily in manufacturing products for sale, the use tax on items withdrawn from inventory for use in real estate construction is based on the fabricated cost price of the items used, but when a firm is primarily engaged in real estate construction, the tax on items withdrawn from inventory for such purpose is based upon the raw material cost of the items.
In this case, your corporation produces both mobile homes and modular homes. While modular homes are subject to the retail sales and use tax when sold at retail, mobile homes are subject to the two percent motor vehicle sales and use tax administered by the Department of Motor Vehicles. Inasmuch as mobile homes are not subject to the retail sales and use tax, I find basis in this instance for permitting your corporation to apply the Regulation Section 630-10-27 primary purpose test to its modular home production only, rather than to its combined mobile and modular home production. I would caution, however, that the primary purpose test must be computed each year, with the test results to be applied on a prospective basis to the subsequent year.
I trust that this will clear up the issues raised in the department's 1981 audit and the audit presently being conducted. If not, or if you have any further questions or concerns, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner