Tax Type
Retail Sales and Use Tax
Description
Government transactions
Topic
Taxability of Persons and Transactions
Date Issued
10-09-1996
October 9, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter in which you seek correction of the retail sales and use tax audit of *****(the "Taxpayer") for the period of January 1992 through December 1994.
FACTS
The taxpayer is in the business of fabricating steel for sale or resale and also for use in real property construction contracts. The Taxpayer has purchased all materials exempt of the retail sales and use tax. The Taxpayer collected tax on all taxable sales of materials sold by them. When materials were withdrawn from inventory for use in real property construction, the Taxpayer would determine at the time of withdrawal the taxability of the material. If the Taxpayer determined the material was to be used in a taxable job, the Taxpayer accrued the tax. The Taxpayer does not have a direct payment permit, however, has requested one in the past and continues to request one. The department has denied the issuance of a direct payment permit as the Taxpayer operates primarily as a contractor with respect to real estate and is required to pay tax on all tangible personal property used in fulfilling such contracts.
The Taxpayer's appeal is based on two issues. First, the Taxpayer is taking exception to the application of the sales tax to tangible personal property held in their tax exempt inventory for future use in real property construction contracts. Second, during the audit period, the Taxpayer contracted to fabricate, deliver and erect steel beams at Washington National Airport. The Taxpayer is of the opinion that the contract with Washington National Airport qualifies as a sale to a government entity, the government entity being the Metropolitan Washington Airport Authority (the MWAA), and is therefore exempt from the tax. The Taxpayer has a direct material purchase order from the MWAA and is requesting that all material used on the Washington National Airport job be removed from the audit.
DETERMINATION
Background
The taxpayer was first audited for the period of January 1986 through December 1988. At that time it was determined that the Taxpayer was operating primarily as a using and consuming contractor and that they must operate in accordance with Virginia Regulation (VR) 630-10-27.E (copy enclosed), i.e., pay tax on the cost price of all materials at the time of purchase. The Taxpayer was advised of the proper tax treatment by way of a letter from the department dated June 15, 1989. The subsequent audit of the Taxpayer for the period of January 1989 through December 1991 revealed that the Taxpayer continued to purchase all materials exempt of the tax and accrue tax on withdrawals. The Taxpayer was advised at the conclusion of this second audit that tax must be paid on all materials at the time of purchase.
Current Audit Appeal
VR 630-10-27.E addresses fabricators who operate in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its own use and consumption in the performance of real property construction contracts. This regulation provides that dual role fabricators shall follow the primary purpose rule based on gross receipts in determining sales and use tax application. As in past audits, it was determined that the Taxpayer was operating primarily as a using and consuming contractor, therefore, the Taxpayer is required to pay the tax at the time of purchase on all tangible personal property used in fulfilling real property contracts.
The Taxpayer continues to requests a direct payment permit. The Taxpayer feels the issuance of a direct payment permit at this time would relieve them of the sales and use tax audit assessment associated with the untaxed inventory. Code of Virginia § 58.1-624 (copy enclosed) addresses the use of a direct payment permit and provides that "the Tax Commissioner may authorize a manufacturer, mine operator, or public service corporation" a direct payment permit when it is impossible to determine at the time of purchase the taxable status of tangible personal property. The statute does not allow the issuance of a direct payment permit to a fabricator for their own use in real property construction contracts. As stated above, VR 630-10-27 provides that a person primarily engaged in fabrication for their own use and consumption in real property construction contracts must pay the tax on all materials at the time of purchase. For this reason, and the fact the Taxpayer has been advised on two previous occasions to pay tax on their purchases, the department finds no basis for removing the untaxed inventory from the audit liability.
In regard to the job at Washington National Airport, the fact that the Taxpayer's contract required them to furnish, deliver and install, renders the Taxpayer a real property contractor with respect to this job and not a retailer. As provided above, a contractor is the user and consumer of all tangible personal property used in real property construction and must pay the tax on all such property. Based on these findings, the department finds no basis for removing tangible personal property installed by the Taxpayer at Washington National Airport from the audit findings.
If you should have any questions, please contact*********, Office of Tax Policy, at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11165K
Rulings of the Tax Commissioner