Tax Type
Retail Sales and Use Tax
Description
Steel fabrication; Dual role contractor
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
03-31-1994
March 31, 1994
Re: 58.1-1821 Application: Retail Sales and Use Tax Audit
Dear*************
This is in reply to your letter on behalf of your client,***************(the "Taxpayer") concerning the sales and use tax audit for the period October 1, 1989, through March 31, 1992.
FACTS
The Taxpayer is a dual role contractor primarily in the business of fabricating steel for sale. However, the Taxpayer also fabricates steel that it erects in the performance of real estate construction contracts. The Taxpayer contests the assessment of tax on labor used to fabricate steel when the steel is purchased and fabricated in conjunction with specific real estate construction contracts.
DETERMINATION
Virginia Regulation (VR) 630-10-27(E) provides that a person who principally fabricates tangible personal property for sale or resale and:
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- [w]ho 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real property construction contracts is liable for the tax based on the fabricated cost price of the personal property withdrawn. Fabricated cost price is computable by totaling the cost of materials, labor, and overhead charged to work in process. (Emphasis added.)
Therefore, when raw materials are fabricated into a product and placed into an exempt sales inventory, the product is typically inventoried at the fabricated cost, which includes the cost of materials, labor, and overhead charged to work in process. These products are usually held in inventory until they are purchased by customers. However, if a person subsequently withdraws the fabricated product from the exempt sales inventory for use in a real property construction contract, then the use tax must be paid on the fabricated cost of the product, instead of merely the raw material cost.
Though a person may fabricate principally for sale or resale, there may be instances when the person knows, at the time tangible personal property is purchased, that it will be used in a specific real estate construction contract. In such instances, VR 630-10-27(B) provides that the contractor which sells tangible personal property and is also a using and consuming contractor:
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- [M]ay 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.
Therefore, tax should be paid to the supplier on the cost of materials if, at the time of purchase, the person knows the materials will be used in a specific real estate construction contract. If the supplier does not charge the tax, the person must pay the use tax directly to the department. Fabrication labor and overhead charged to work in process would not be taxable under these circumstances.
In view of this information, if the Taxpayer can provide documentation to verify what materials were intended for specific real estate construction contracts at the time of purchase, the corresponding fabrication labor will be removed from the audit. The**********District Office will be contacting the Taxpayer within 30 days so that the necessary revisions can be made. Once the revisions are completed, a corrected Notice of Assessment will be issued, which will be immediately due and payable.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6723N
Rulings of the Tax Commissioner