99-54 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Government contractor; Water supply pumping equipment; Annexation to real property; Public utility vs. municipality

Topic

Collection of Delinquent Tax

Date Issued

04-07-1999

April 7, 1999

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear*************

This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period March 1995 through December 1997. I regret the delay in answering your appeal.

FACTS

The Taxpayer operates as a mechanical and general contractor. The issue in this case concerns the Taxpayer's purchase and installation of pumps in existing water supply pump stations. You describe the pumping equipment as having 600 horsepower motors and 18 inch diameter pipe connections. This equipment was purchased and installed by the Taxpayer for Virginia municipalities and for water and sewer authorities controlled by Virginia municipalities.

The Taxpayer was assessed the tax for untaxed purchases of pumps and components. In this regard, the audit staff deemed the Taxpayer to be a using and consuming contractor. You maintain that the pumps and components do not become incorporated into real estate nor lose their character as personal property. Accordingly, you conclude that the contested items may be purchased by the Taxpayer exempt of the tax for resale.

In addition, the Taxpayer maintains that other sales and use tax exemptions apply to the contested transactions, including: (1) the industrial manufacturing exemption, (2) the exemption available to purchases by government entities, and (3) the exemption available to public service utilities.

DETERMINATION

Title 23 of the Virginia Administrative Code (VAC) 10-210-410 indicates that "a person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor....' This regulation also provides that:

- A contractor is defined as any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon ... and in connection therewith to furnish tangible personal property.... Unless otherwise noted, the law treats every contractor as the user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.

In determining whether a particular commodity remains tangible personal property or becomes realty upon installation, the Virginia Supreme Court has ruled that:

- Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered.... Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970).

A copy of Transcontinental is enclosed. It is especially relevant because the property in question consisted of gas pipes and related machinery and equipment. The Court held that gas pipes and the machinery used to distribute gas to customers were properly classified as real estate. Note also that the Court's decision in Transcontinental relied on an earlier case which specifically addressed a municipal waterworks (see City of Newport News v. Warwick County, 159 Va. 571, 166 S.E. 570 (1932)). In referencing the earlier case, the Court stated:

- The City reserved the right to remove its water mains and replace them as necessary for the proper operation of the system, and in fact found it necessary to renew half of the mains. We held that the mains, together with the gates, hydrants and pipes annexed thereto, within the limits of the County, constituted fixtures upon the land to which they were attached and were taxable as land.

Based on the court's decisions, the contested pumps and components became realty upon installation. Further, this determination is consistent with information provided to me by the Virginia Association of Assessing Officers. That organization informs me that machinery and equipment (including pumps, valves and motors) used at pumping stations are classified as real estate.

Having determined that the contested items become realty upon installation, I will address the other issues you raise, as follows:

Manufacturing exemption: Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, tools, and other items used directly in the manufacture of tangible personal property for sale or resale in the industrial sense. Also, the definition of "manufacturing' in Code of Virginia § 58.1-602 provides, in part, that the term "industrial in nature' shall include all businesses classified in "codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual.'

I find no indication that the department or the Virginia courts have ever deemed water supply or water treatment utilities as industrial manufacturing. Further, such utilities are classified in SIC codes 4941 and 4952, respectively, and are thus outside of the statutory definition of "manufacturing.' Accordingly, the industrial manufacturing exemption is not applicable in this case.

Government exemption: Code of Virginia §58.1-609.1(4) provides an exemption from the sales and use tax for "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.' However, § 58.1-610(A) deems real estate contractors to be the taxable users and consumers of all tangible personal property purchased in connection with the "construction, reconstruction, installation, repair or other service with respect to real estate.

Accordingly, 23 VAC 10-210-410(J) provides generally that the tax applies to all purchases of tangible personal property by contractors for their own use or consumption in connection with real property construction contracts with the government. Accordingly, real property contractors are liable for the payment of the tax on all of purchases of materials from suppliers. The department's long-standing position in this regard is shown in the enclosed Public Document 91-118 (7/17/81) which concerns a contractor's purchases for a government-owned utility.

There are two exceptions to the above. First, Taxpayer would not be liable for the tax for tangible personal property purchased directly by its government customers and then furnished to the Taxpayer. Another exception is when the credit of a government entity is bound directly to the purchase of the tangible personal property and a contractor has been officially designated as the purchasing agent for the government entity.

There is no indication in the instant case that either of these exceptions applies. Accordingly, the government exemption is not applicable.

Public service exemption: In pertinent part, Code of Virginia § 58.1-609.3(3) provides an exemption for tangible personal property sold to "a public service corporation subject to a state franchise or income tax upon gross receipts....' As set out in 23 VAC 10-210-3020(B):

- The term "public utility' as used herein is synonymous with "public service company' or "public service corporation' and means all business entities deemed to be public utilities within the definitions set forth under Sections 56-232 and 56-265.1 of the Code of Virginia. Such entities have been issued certificates of convenience and necessity by the State Corporation Commission.... (Emphasis added)

The department has not been able to determine that the Taxpayer's customers in this case are public service corporations as defined above. The department has twice spoken with the State Corporation Commission. That agency could not confirm the utility customers in this case have been issued certificates of convenience and necessity. I am further informed that utility entities owned and operated by municipalities are not generally deemed to be regulated public service corporations.
Based on the information before me, the exemption available for public service corporations, and contractors installing property for public service corporations, does not apply to the contested transactions. However, I will certainly review any additional documents which the Taxpayer can provide on this issue.

Prior ruling: Finally, the determination set out in this letter is consistent with the department's January 1993 letter to the Taxpayer. In that letter, the Tax Commissioner advised the Taxpayer that pumps and boilers which became realty upon installation are used and consumed by the contractor, regardless that the items were purchased in connection with construction contracts with the federal government. The Tax Commissioner also invited the Taxpayer to describe the method of installation and the intended use of the property (so that the department could determine if the items became realty or remained tangible personal property). However, I find no indication that additional information was provided.

Summary: Based on this determination, the assessment is correct. Interest on the assessment will be accrued to 60 days from the date of your letter, and an updated bill will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date of that bill. Interest will accrue to date if the bill is not paid within the 30 day period.

Please contact ***** in the department's Office of Tax Policy at ***** if you have any questions concerning this letter.

Sincerely,

Danny M. Payne
Tax Commissioner
OTP/16324I

Rulings of the Tax Commissioner