Did a customer's direct payment permit relieve a real-property contractor from tax on materials used in the customer's construction projects?

Subject

Assessed tax on untaxed purchases used in real property construction contracts

Plain-English summary

Virginia upheld use tax on construction materials because the customer's direct payment permit did not relieve the real-property contractor of its own tax responsibility.

A direct-pay permit excused a dealer from collecting tax on sales of tangible property to the permit holder. This taxpayer was instead a using and consuming contractor that incorporated materials into real property. The legal incidence of tax remained on the contractor's material purchases.

The contractor asserted that the customer had already accrued and paid tax, but supplied no proof. Even if the customer had paid, Virginia said that payment would have been erroneous and the customer could seek a refund; it would not cancel the contractor's assessment.

What this means for you

• Do not accept a customer's direct-pay permit as a substitute for contractor tax on incorporated materials without authority.
• Distinguish a dealer's sale to a permit holder from a contractor's consumption in real-property work.
• Obtain invoices and payment records before claiming duplicate tax.
• If the wrong party paid, that party may need a separate refund claim.

Common questions

Did the direct-pay permit bind the contractor's suppliers? The ruling says it did not relieve this using and consuming contractor.

Would actual customer payment erase the assessment? No. The customer would have paid in error and could pursue a refund.

Did the contractor prove duplicate payment? No.

Citations and references

• Va. Code § 58.1-624.
• P.D. 96-158 (June 26, 1996) and P.D. 98-145 (October 9, 1998).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-124

Original ruling text

August 17, 2007

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

Dear *:

This is in reply to your letter in which you seek a reconsideration of the Department's prior response regarding the retail sales and use tax assessment issued to * (the "Taxpayer") for the period June 2001 through May 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a contractor. As a result of the Department's audit, the Taxpayer was assessed tax on certain untaxed purchases used in real property construction contracts in Virginia.

The Taxpayer's customer issued purchase orders to the Taxpayer to perform various real property construction projects at the customer's production plant. The customer holds a direct payment permit from the Department that allows the customer to avoid payment of the tax to a dealer selling tangible personal property, and to make payment of the tax directly to the Department. The customer advised the Taxpayer that it would accrue and remit the tax to the Department on all purchases. The Taxpayer contends that its customer has paid the tax on the transactions at issue through its direct payment permit and argues that any payment of the Department's audit assessment would constitute collection of the tax twice by the Department.

DETERMINATION

As noted in my prior response, the direct pay permit provisions in Va. Code § 58.1-624 provide that upon receipt of a direct pay permit number, a dealer is absolved from all duties and liabilities for collection and remittance of the tax with respect to sales, distributions, leases, or storage of tangible personal property to the permit holder. In this case, the Taxpayer is not a dealer, but rather is a using and consuming contractor. The direct pay permit provided by the Taxpayer's customer does not relieve the Taxpayer from its responsibility to pay tax on the purchase of materials used in connection with real property contracts.

While the Taxpayer asserts that its customer has accrued and paid the tax, the Taxpayer has provided no evidence to support its contention. If the Taxpayer's customer has in fact accrued and remitted the tax on the transactions at issue, the customer has incorrectly paid the tax and would be entitled to a refund. The legal incidence and responsibility for the payment of the tax falls upon the Taxpayer and as such, I do not find cause to alter the Department's assessment. My determination in this case is consistent with similar decisions issued in Public Documents 96-158 (6/26/96) and 98-145 (10/9/98).

An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days from the date indicated on the bill statement.

The Code of Virginia section and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1023455657Q