Tax Type
Retail Sales and Use Tax
Description
Construction; Modular Homes
Topic
Taxability of Persons and Transactions
Date Issued
06-29-1992
June 29, 1992
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear*****************
This will reply to your correspondence seeking correction of a sales and use tax assessment against*****************(the Taxpayer) for sales and use tax.
FACTS
The Taxpayer is a parent corporation with three subsidiaries engaged in the manufacture of modular and panelized homes in Maryland (Facility 1), Front Royal, Virginia (Facility 2), and Boone's Mill, Virginia (Facility 3). The facilities fabricate modular homes and either furnish and erect the units for a purchaser, or sell the units to a purchaser nonerected.
Facility 2 was audited for the period of June 30, 1984 through May 31, 1987, and it was determined that more than 50% of the gross receipts were attributable to sales of nonerected units, resulting in an assessment under the "primary purpose" test set out in Virginia Regulation (VR) 630-10-27(E).
The Taxpayer requests that the activities of its two plants serving the Virginia market during the audit period (Facilities 1 and 2) be consolidated for purposes of computing the primary purpose test. In addition, the Taxpayer requests to use a similar method for the future, taking into account the activities of Facilities 1, 2, and 3. Finally, the Taxpayer challenges the requirement that its facilities have separate certificates of registration.
DETERMINATION
Combined and Consolidated Returns
VR 630-10-21(D)(1) provides that a combined return can only be filed when a dealer has two or more businesses operating within the same locality. VR 630-10-21(D)(2) provides that a consolidated return may only be filed when a taxpayer has five or more businesses within the state. Additionally, Va. Code §58.1-613, as explained in VR 630-10-21, provides that a separate certificate of registration is required for each business location, even if combined or consolidated filing is allowed.
The Taxpayer has two facilities in Virginia, in two different localities. Therefore, the Taxpayer fails to meet the requirements for filing combined or consolidated returns as provided above and must file individual returns for each facility. The Taxpayer is also required to maintain separate certificates of registration for each facility as required in Va. Code §58.1-613.
Retailer vs. Contractor
VR 630-10-27(E) addresses the application of the tax to persons operating in a dual capacity of fabricating items for sale or resale and as a using or consuming contractor. It provides that any person who is "principally" (more than 50%) fabricating items for sale or resale will be treated as a retailer. Further, items withdrawn from inventory by such fabricator for use on construction contracts or promotional purposes must be taxed on their fabricated cost (cost of materials, labor and overhead charged to work in progress.)
Based on the figures provided by the auditor and the Taxpayer, Facility 2 derives more than 50% of its gross receipts from retail sales and thus is deemed to be fabricating principally for sale or resale. Therefore, when Facility 2 withdraws tangible personal property for use in construction contracts, the tax will be imposed based on the fabricated cost price. Facility 3 derives more than 50% of its gross receipts from erected sales, and therefore is considered a using and consuming contractor. As such, Facility 3 must generally pay the tax on the cost price of the materials at time of purchase, absent a direct pay permit.
Although not stated in VR 630-10-27(E), it is implicit that the primary purpose test be computed on a plant by plant basis, rather than for the corporation as a whole. This is due to the fact that plants operated by the same corporation may be engaged in substantially dissimilar production activities, thus skewing the test computation. Even where separate plants produce the same product, market conditions (how the products will be used) may be quite dissimilar, again skewing the computation.
The department has never granted permission for the aggregation of test results from two or more plants. In fact, in at least one instance, See P.D. 86-8 (1/8/86), copy enclosed, separate computation of the test was provided for separate production lines at the same plant site of a manufacturer of mobile and modular homes. Separate computation was used in that instance as the test results from the two lines were substantially dissimilar and aggregation would have substantially distorted the computation of the tax.
It is also implicit in VR 630-10-27(E) that the application of the tax will vary depending upon the gross receipts for any given period. The Taxpayer must compute on an annual basis the gross receipts attributable to sales versus use in construction contracts to determine the correct application of the tax, applying the results of the determination under the primary purpose test on a prospective basis, for each facility. (See P.D. 85-220 (12/11/85), copy enclosed.)
Accordingly, I find no basis for a correction of the assessment. Interest will be accrued through September 1, 1988 and a revised Notice of Assessment will be mailed to the Taxpayer under separate cover.
Additionally, separate direct pay permits may be issued to Facility 2 and Facility 3. If you have not already done so, an application may be made by contacting the department's Processing Services Division, Registration Section, P.O. Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/2716I
Rulings of the Tax Commissioner