Tax Type
Retail Sales and Use Tax
Description
Fabrication labor charges
Topic
Taxability of Persons and Transactions
Date Issued
05-07-1987
May 7, 1987
Re §58 1-1821 Application/ Sales and Use Tax
Dear **************************
This will reply to your letter of January 1, 1987 seeking correction of an assessment issued in the above reference case for the audit period August 1, 1983 through May 31, 1986
FACTS
**************** (taxpayer) is principally engaged in the installation of window frames and glass in commercial construction projects On an occasional basis the taxpayer must purchase aluminum trim to surround or finish off these off window frames. In general, the taxpayer cuts and trims the aluminum in its own shop to meet the specifications of a particular job However, on occasion, the taxpayer finds it necessary to utilize the services of an outside metal fabricator to do such cutting and trimming In a recent audit by the department the taxpayer was held liable for the tax on its untaxed purchases of such fabrication from outside firms.
The taxpayer does not disagree with the auditor's finding that the work performed by such outside firms represented "fabrication" within the meaning of Virginia's sales and use tax law and regulations However, the taxpayer does contest the imposition of the tax on such transactions stating that since under §630-10-27(D) of the Virginia Retail Sales and Use Tax Regulations it is deemed to be the taxable user and consumer of the raw aluminum at the time of purchase, it should not also be held liable for the tax on the cost of fabricating such aluminum after it has been purchased.
In addition, the taxpayer contends that since it could have performed the fabrication work itself in its own shop without having to incur any additional sales tax liability, it should not have been held liable for the tax simply for having utilized the fabrication services of another firm.
DETERMINATION
Section 58 1-603 of the Virginia Code provides for the imposition of the sales tax on the gross sales price of tangible personal property sold in this State or of services taxable in this State §58.1-602(16) then defines the term "sale" to mean:
"the transfer of title or possession or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and as rendition of a taxable service for a consideration, and includes the fabrication of tangible personal property for consumers who furnish, either directly or indirectly, the materials used in fabrication... "
"Fabrication" is then defined in §630-10-37 of the Virginia Retail Sales and Use Tax Regulations as "[a]n operation which changes the form or state of tangible personal property " This section provides further that [t]he tax applies to the charges for the fabrication of tangible personal property for users or consumers who furnish either directly or indirectly, the materials used in the fabrication work."
In addition, §630-10-27(D) of the regulations provides that [a] fabricator who contracts to perform services with respect to real estate construction, and in connection therewith to furnish tangible personal property for incorporation in real estate construction thereby causing it to lose its identity as tangible personal property by becoming real property, is classified as a using or consuming contractor and must pay the tax on the cost price of the raw materials which make up much fabricated property."
Notwithstanding the taxpayer's well developed and articulated arguments to the contrary, I cannot agree that the provisions of §630-10-27(D) of the regulations extend an exemption to the taxpayer on its purchases of fabrication services performed by third parties in connection with its provision of tangible personal property for incorporation into real property construction, The provision of such fabrication work by the taxpayer itself is distinguishable from the provision of such work by third parties since there is no "sale" of tangible personal property or services within the meaning of the sales and use tax law when the taxpayer provides such services itself.
Therefore, the auditor was correct in holding the taxpayer liable for the tax on its untaxed purchases of such fabrication services from third parties and the balance of the assessment is now due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner