Tax Type
Retail Sales and Use Tax
Description
Services-repair and installation; Lighting and HVAC equipment
Topic
Taxability of Persons and Transactions
Date Issued
01-15-1997
January 15, 1997
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 June 1992 through November 1995.
FACTS
At the time of the audit, the Taxpayer operated three retail stores in Virginia. Two of the Taxpayers Virginia stores were located in Fairfax County and the third was located in Henrico County. Both of the Fairfax stores filed under one registration number and the Henrico store filed under a separate number. The auditor conducted a one month sales sample on one of the stores located in Fairfax County and applied the same error factor to the other Fairfax location and the Henrico location. The Taxpayer is taking exception to this extrapolation method as discussed in further detail below.
The Taxpayer is also taking exception to purchases on which the Taxpayer did not pay sales tax to the supplier or accrue use tax. These purchases will also be discussed separately below.
DETERMINATION
Based on the one month sales sample of one of the Taxpayers' retail stores in Fairfax County, it was determined that sales were understated by 2.3%. The same error factor was applied to both the second Fairfax store and also the Henrico location. It is noted in the auditor's comments that the Taxpayer agreed to this extrapolation method at the time the audit was performed. The sales error was the result of sales made in Virginia and shipped outside the state for which the Taxpayer did not collect the tax, and also exempt sales for which the Taxpayer had no exemption certificates on file.
Out of State Sales
Virginia Regulation (VR) 630-10-51, copy enclosed, addresses sales in interstate and foreign commerce and states, in part, the following:
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- The tax does not apply to sales on tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia.
In order for the sales in question to qualify for the interstate commerce exemption, delivery of the property must be made to the customer (purchaser) outside the State of Virginia. As understood by this office, the sales in question were made to the customer at the Virginia location. While the customer did not take actual possession of the property, the customer is deemed to have taken constructive possession of the property in Virginia when it directs the property to be delivered to another party, thus rendering the transaction taxable for Virginia tax purposes. Based on the strict construction of the interstate and foreign commerce exemption, there is no basis for exempting the items in question as interstate commerce. The department's position is further explained in the Tax Commissioner's ruling found in P.D. 93-217, copy enclosed.
Exempt Sales
The exempt sales disallowed in the audit sample were sales to diplomatic personnel made from one of the Northern Virginia stores. Due to the fact this was the only sales sample performed, the error factor created by diplomatic sales carried over to the Henrico County store location. The Taxpayer takes exception to these exempt sales being disallowed for all locations.
The diplomatic exemption is set forth in VR 630-10-45.F (copy enclosed) and provides for the following:
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- Pursuant to the provisions of the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations, no sales or use tax is applicable to sales to or purchases by certain foreign diplomats... In order to qualify for exemption, the purchase must be made by the person to whom the card is issued. No exemption certificate is required; however. the record of sale must indicate the exemption card number of the purchaser. (Emphasis added).
According to the information provided in your letter, the exemption card number and the diplomats out of country address is stored in the store's computerized register. Upon verification of this information by the auditor, all documented sales will be removed from the sales sample.
With regard to the fixed asset and expense purchases, which were audited in detail in both audits, I will address the two audits separately below.
Northern Virginia Stores
**********************
Based on the information provided and further review by the auditor, these items will be removed from the audit.
*********************************
Based on the information provided and further review by the auditor, these items will be removed from the audit.
************************
Based on the information provided and further review by the auditor, these items will be removed from the audit.
******************** was contracted to install fixtures, cabinets, and paneling in the Northern Virginia stores. VR 630-1 0-27.G (copy enclosed) addresses contractors or retailers selling and installing tangible property and provides that a retailer selling and installing tangible personal property, i.e. cabinets, that becomes real property after installation, remains a retailer and must charge the tax on the sale of the cabinets. This regulation goes on to say that a retailer shall be deemed to be any person who maintains a retail or wholesale place of business, an inventory..., and who performs installation as part of or incidental to the sale.
Based on the reading of the contract between the Taxpayer and**********************
and the fact that ***********is not registered as a Virginia sales and use tax dealer, it is apparent that*********** is operating as a using and consuming contractor with respect to real estate in the State of Virginia. Based on these findings, these items will be removed from the audit.
Henrico County Store *********************
*********************
The Taxpayer contracted with ***********for architectural design work for all of the Taxpayer's stores throughout the world which were to be opened in 1994. The amount included on the purchases exception list in the audit workpapers was for the allocated apportionment of the cost associated with the Virginia store. According to your letter, the design cost was associated with architectural expenditures and not for tangible personal property. I will agree to remove these allocated costs from the audit findings.
*****************************
Similar to the situation described above, this item consists of the Virginia apportionment attributable to the storage of theme props in California. Theme props for all stores are stored in a warehouse in California from which shipments are made to the stores under construction throughout the United States. Due to the fact that this item does not represent tangible personal property entering Virginia, but is a cost attributable to storage, I will agree to remove this item from the audit.
**********************************
These items held taxable in the audit consists of blueprints, sepias, architectural drawings and architectural surveys. The Taxpayer feels that these items constitute the rendition of a service and are therefore not subject to the tax.
Code of Virginia § 58.1-602 defines a "sale" as, "any transfer of title or possession,... in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration...". VR 630-10-97.1 provides an exemption for services which involve sales as inconsequential elements for which no separate charge is made. A "true object" test is used to determine whether a particular transaction which involves both the rendering of a service and the provision of property is exempt. In applying the true object test in this instance, it is determined that the true object sought by the Taxpayer is not a service, but the property produced by the service. In addition, VR 630-10-82 provides that the tax applies to "sales of photographs, portraits,... blueprints, frames, camera film, etc." (Emphasis added.) The department's position is further supported by the fact that the blueprints, sepias, surveys, etc. were purchased in large quantities, which indicates the Taxpayer was seeking the tangible personal property and not solely the services of providing the tangible personal property.
The Taxpayer purchased HVAC control equipment and lighting control equipment from . The Taxpayer maintains that any tangible personal property installed by a real property contractor is taxable to the contractor. In reading the Contract Bid Report, the limited warranty, and the invoices for the HVAC and lighting control equipment, there is no indication that ******** actually did the installation. In fact, the limited warranty provides that********is not liable for any damage done to the equipment by the installing contractor or the customer. Unless the Taxpayer can provide to the auditor evidence that ********furnished and installed the equipment in question, I find no basis for removing the equipment from the audit.
*****************************
*********, a California company, provided molding, detail trim, corner curtain, and other tangible personal property for installation at Taxpayer's Henrico County store. The tangible personal property in question was shipped to the Taxpayer's storage warehouse in California prior to being shipped to Virginia. **** did (not) charge California sales tax on the invoice. The Taxpayer feels that since this property will become part of real property after installation, the tax should not apply.
VR 630-10-109 provides that "the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased". The fact that tangible personal property eventually becomes a part of real property upon installation does not automatically exempt such property from the tax. The fact that the property in question was delivered to Virginia absent of sales or use tax being paid, would subject such property to the Virginia use tax. I find no basis for removing these items from the audit.
Based on the information provided, this item will be removed from the audit.
********************************
Based on the information provided, I am unable to determine if the contract with ****************,
included the installation of all light fixtures or the provision of the light fixtures only. Provided the Taxpayer can substantiate to the auditor that ***************, did all the contract installation, I will agree to remove these items from the audit. Otherwise, I have no alternative but to hold all the light fixtures taxable as the purchase of tangible personal property.
********************************
Based on the information provided, this item will be removed from the audit.
*********************************
See ************** under Northern Virginia Stores section. Based on this information and additional information provided by the auditor, these items will be removed from the audit.
***********************************
Based on the information provided, this item will be removed from the audit.
*****************************
Based on the information provided, this item will be removed from the audit.
************************
Based on all of the above, these audits will be returned to the auditor for the appropriate revisions. Once the audits have been revised, revised notices of assessment will be mailed to the Taxpayer. If you should have any questions in regard to the revisions or this determination, please contact ********* , Office of Tax Policy, at *********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11225K
Rulings of the Tax Commissioner