When did Virginia treat a countertop fabricator as a retailer rather than a real-property contractor?

Subject

Retailer v Contractor, Direct Pay Permit

Plain-English summary

A granite and marble countertop company both sold fabricated countertops and furnished countertops for installation in real property. Virginia said its sales-tax treatment turned on its primary purpose, measured annually by gross receipts.

If sales without installation were at least 50% of overall sales, the company was principally a retailer. It would collect sales tax on retail countertop sales and pay use tax on the fabricated cost price of countertops used in its real-property contracts.

If furnished-and-installed contracts were at least 50%, the company was principally a real-property contractor. Hiring a subcontractor to install the countertops did not change that classification. The company had to perform the comparison each year and apply the result prospectively.

A dual-capacity fabricator uncertain how inventory would ultimately be used could apply for a direct-payment permit only if it principally fabricated for sale or resale. Virginia also rejected the argument that countertops received automatic retailer treatment as items comparable to cabinets or kitchen equipment.

What this means for you

• Mixed fabrication businesses should separate gross receipts from sales without installation and contracts that include affixing property to realty.
• Subcontracting installation does not necessarily turn a furnish-and-install contract into a retail sale.
• Classification can change from year to year, so the annual calculation and records matter.

Common questions

What percentage made the company principally a retailer?

At least 50% of overall sales from countertops sold without installation.

Could the company buy all bulk inventory tax-free because it did not know the final use?

The ruling said it could apply for a direct-payment permit if it principally fabricated for sale or resale.

Were countertops treated like cabinets under the special retailer rule?

No. Virginia said countertops were not like or comparable to the listed cabinets, kitchen equipment, or similar items.

Citations and references

• 23 VAC 10-210-410(E), primary-purpose rules for dual-capacity fabricators.
• 23 VAC 10-210-410(G), specified sellers and installers treated as retailers.
• P.D. 85-220 and P.D. 92-114, annual prospective classification.
• P.D. 96-111 and P.D. 00-83, countertops distinguished from cabinets and kitchen equipment.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-108

Original ruling text

July 6, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on the application of the retail sales and use tax to countertops sold by * (the "Taxpayer"). I apologize for the delay in responding to your letter.

FACTS

In 2003, the Taxpayer fabricated and installed granite and marble counter tops. During that time, customers would select a surface type from the various samples in its showroom. The product would be removed from inventory and fabricated into a custom counter top. Once fabricated, the Taxpayer would install the counter tops for the majority of its customers.

In late 2004, the Taxpayer's business changed with the addition of a new warehouse fabrication facility. Using new machinery and computerized tooling, the Taxpayer began fabricating counter tops on a wholesale basis with another company installing them. The Taxpayer still maintains a staff of people to provide installation services when needed.

The Taxpayer requests a ruling that it is deemed a retailer of counter tops. The Taxpayer maintains a large inventory of granite and marble. At the time of purchase, it does not know whether the raw materials will be sold at retail or wholesale, or used in real property installations. The Taxpayer believes it should be able to purchase bulk inventory exempt of the tax and collect the sales tax on retail sales without installation or pay use tax on the fabricated cost price when used in real property installations.

The Taxpayer believes that it falls within the provisions of Title 23 of the Virginia Administrative Code (VAC) 10-210-410 E and G.

P. D. 07-108

July 6, 2007

Page 2

RULING

Retailer vs. Contractor

When a manufacturer or processor operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its use and consumption in the performance of real property construction contracts, such person must follow the primary purpose rules based on gross receipts in determining sales and use tax application. Such rules are set out in subsection E of Title 23 of VAC 10-210-410.

The Taxpayer will be considered a retailer when it principally fabricates counter tops for sale or resale without installation, provided such sales represent at least 50% or more of its overall sales. When this is the case, the Taxpayer would collect the sales tax on retail sales of counter tops without installation and pay the use tax on the fabricated cost price of counter tops used in real property installations. On the other hand, the Taxpayer will be considered principally fabricating counter tops for use in construction contracts if its contracts for the sale and installation of counter tops represent 50% or more of its overall sales. For instance, the Taxpayer is a real property contractor when it agrees to furnish and affix counter tops to realty even if it hires a subcontractor to perform the installation work.

The tax application to the Taxpayer's business depends upon its primary purpose. Because the Taxpayer's business activities may vary from year to year, the Taxpayer must annually compare its gross receipts attributable to sales without installation versus real property installation contracts ( i.e. , sales with installation) to determine its primary purpose. Once the primary purpose is determined, the Taxpayer must apply the results on a prospective basis. See Public Documents 85-220 (12/11/85) and 92-114 (6/29/92).

Direct Pay Permit

A dual capacity fabricator that does not know at the time of sale how its raw materials will be used or sold may apply to the Department for a direct payment permit provided it principally fabricates for sale or resale. Such requests should be sent to the Department's Office of Customer Relations, Customer Satisfaction Team, Post Office Box 546, Richmond, Virginia 23218-0546.

Treatment under Title 23 VAC 10-210-410 G

Pursuant to subsection G of Title 23 of VAC 10-210-410, a person selling and installing cabinets, kitchen equipment, or other like or comparable items is treated as a retailer and not as a using or consuming contractor with respect to them. It has been the long-standing policy of the Department that counter tops are not like or comparable to cabinets, kitchen equipment ( e.g. , stoves or ovens), or any of the other items specified in the above regulation. See P.D. 96-111 (5/31/96) and P.D. 00-83 (5/16/00). Accordingly, such retailer provisions have no application in this case.

P. D. 07-108

July 6, 2007

Page 3

The Department has initiated a regulation revision project for all its regulations. When Title 23 of VAC 10-210-410 is reviewed, we will consider your comments and solicit comments from the public at that time.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this ruling, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-845756525R