Was a cabinet fabricator a real-property contractor when customers separately hired and paid an independent installer?

Subject

Taxpayer is not a real property contractor because it performs no installation work

Plain-English summary

Virginia treated the custom cabinet fabricator as a retailer, not a real-property contractor, for cabinets it did not install and had no contractual duty to install. Sales tax applied to the full cabinet sales price.

The fabricator referred customers to an independent installer, but customers hired and paid that installer directly. The fabricator did not bill for installation, receive installer compensation, or include installation in its purchase agreements.

Those facts made the transaction a sale of fabricated tangible personal property under the retail rule. The special cabinet rule for sellers that also install did not apply, and holding a Class C contractor's license did not change the transaction.

Because the fabricator had already paid sales and use tax on raw materials incorporated into the retail cabinets, the Commissioner allowed those payments as a credit against the assessed sales tax and ordered the audit revised.

What this means for you

• Referral to an installer does not make the seller a contractor when the customer contracts separately.
• Written agreements should clearly state who is obligated to install and who receives the installation payment.
• A contractor's license does not override the actual sales and installation arrangement.
• Retail fabricators generally buy incorporated materials for resale rather than paying tax and then also owing tax on the retail sales price.

Common questions

Did the lack of a showroom or finished-goods inventory make the fabricator a contractor? No. Those factors belonged to a special rule for sellers that install; this taxpayer did not install.

Was the independent installer the fabricator's subcontractor? The ruling describes direct customer payment and no contractual installation obligation for the fabricator.

Did Virginia give any credit? Yes. It credited tax paid on raw materials against the sales tax assessment.

Citations and references

• 23 VAC 10-210-410(C), (E), and (G).
• P.D. 94-144 (May 9, 1994) and P.D. 01-60 (May 15, 2001).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-161

Original ruling text

October 17, 2007

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

Dear *:

This is in response to your letter requesting correction of a retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period January 2004 through July 2006.

FACTS

The Taxpayer fabricates cabinets for contractors, businesses and homeowners. At issue are the cabinets the Taxpayer did not install but arranged for their installation with an independent installer. The Taxpayer did not bill for or receive any compensation from customers or installers for the installation of such cabinets. Rather, the customers paid the installer directly. Further, the purchase agreements state that installation is not included in the contract amounts. Notwithstanding this arrangement, the Taxpayer treated itself as a contractor of these cabinets and paid the sales and use tax on its purchases of raw materials.

Because of the lack of a contractual obligation for installation work, the Department's auditor determined that the contested transactions should be treated as retail sales of cabinets pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-410 C. Sales tax was assessed on the total charge to the customer.

The Taxpayer contends that the auditor's treatment is incorrect because it maintains no retail or wholesale showroom and keeps no inventory of finished cabinets as to be deemed a retailer as defined by Title 23 VAC 10-210-410 G. A small amount of basic raw materials are maintained on site, but the vast majority of the raw materials used to fabricate its products are not purchased until a customer places an order. The Taxpayer holds a Class C contractor's license with the locality.

DETERMINATION

Section G of Title 23 VAC 10-210-410 is a special regulation applicable to contractors or retailers selling and installing certain types of items that become real property after installation. This regulation sets out the following:

A person selling and installing tangible personal property that becomes real property after installation is generally considered a contractor, except that a retailer selling and installing fences, venetian blinds, window shades, awnings, storm windows and doors, floor coverings (as distinguished from floors themselves), cabinets, kitchen equipment, window air conditioning units or other like or comparable items is not classified as a using or consuming contractor with respect to them.

For purposes of this subsection only, a "retailer" shall be deemed to be any person who maintains a retail or wholesale place of business, an inventory of the aforementioned items and/or materials which enter into or become a component part of the aforementioned items, and who performs installation as part of or incidental to the sale of the aforementioned items. As so defined, a retailer is not classified as a using or consuming contractor with respect to installations of the aforementioned items. A retailer must treat such transactions as taxable sales except that installation charges when separately stated on an invoice are exempt from the tax.

Persons who are not classified as retailers within the definition set forth above and who sell and install fences, venetian blinds, etc., are deemed to be contractors and must pay the sales tax on such items at the time of purchase.

The provisions cited above under Title 23 VAC 10-210-410 G are only applicable to persons selling and installing cabinets or other types of items as specifically mentioned above. In this case for the transactions at issue, the Taxpayer is not selling and installing cabinets. Nor has it contractually obligated itself for the installation of cabinets. Therefore, the above special regulatory provisions are not applicable to the Taxpayer's business. Rather, the provisions applicable to the Taxpayer are found under Section C of Title 23 VAC 10-210-410, which provides the following:

A person who fabricates tangible personal property and sells it to customers, including contractors, for use or consumption by them, must add the sales tax to the sales price and collect it from the customer for payment to the state. Raw materials, component parts, and other tangible personal property to be fabricated for sale may be purchased under a resale certificate of exemption.

Based on the above provision and the lack of any contractual commitment by the Taxpayer for installation work related to the contested sales, it is clear that the Taxpayer operated as a retailer of such sales and should have collected the sales tax based upon the sales price of items sold during the audit period. As such, the Taxpayer was subject to the provisions of Section C of Title 23 VAC 10-210-410. The fact that the Taxpayer holds a Class C contractor's license is not dispositive of the issue.

Furthermore, the two public documents cited in the Taxpayer's appeal do not alter this determination. In Public Document (P.D.) 94-144 (5/9/94), a fabricator that sold and installed staircases was deemed a real property contractor and thus liable for the tax on the cost price of raw materials. With respect to P.D. 01-60 (5/15/01), the cabinetmaker sold cabinets primarily without installation but also sold and installed some cabinets. Accordingly, the cabinetmaker was subject to the dual capacity rules of Section E of Title 23 VAC 10-210-410 and held liable for the tax on installed sales based on the cost price of materials (because it lacked a finished goods inventory).

In the case at issue, the Taxpayer is not a real property contractor of the sales at issue because it performs no installation work and is not contractually bound to perform the installation work. Thus, the circumstances described in the two public documents cited above are unlike the Taxpayer's situation. Because the Taxpayer sold cabinets without installation, it was subject to the provisions of Section C of Title 23 VAC 10-210-410 and, therefore, is deemed a retailer required to collect sales tax on the full sales price.

Because the Taxpayer paid sales and use tax on purchases of raw materials subsequently incorporated into cabinets sold at retail, I will allow a credit for such tax payments to be applied against the sales tax assessed to the Taxpayer in this case. The audit will be revised accordingly.

CONCLUSION

The audit will be revised in accordance with this determination. Once the revision is completed, a revised bill or statement with interest accrued to date will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill or statement date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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 determination, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1294815042R