Did a customer's direct pay permit shift tax on a mechanical contractor's materials and operated equipment to the customer?

Plain-English summary

Virginia upheld the 2004 assessment because the mechanical contractor was the taxable user and consumer of materials used in its contracts. The company performed painting, sandblasting, repair, pressure washing, and cleaning work in Virginia.

For real-property contracts and nontaxable painting or sandblasting services, the contractor owed sales tax to suppliers or had to accrue use tax on equipment, paint, materials, supplies, and other property used in the work. It was not reselling those items to its customer merely because they were used on the customer's job.

The customer's direct pay permit did not shift liability. A permit relieved a dealer only for sales to the permit holder, while the taxpayer—not the customer—purchased and consumed these materials.

Equipment described on invoices as rented also remained the taxpayer's responsibility. Its employees operated the equipment, and the customer never took possession or control. The assessment had been paid, so the Department denied a refund.

What this means for you

• Contractors and service providers can owe tax as consumers even when costs are passed through to a customer.
• A customer's direct pay permit does not cover a contractor that is not the permit holder.
• Operated equipment is not shifted to the customer when the contractor retains possession and control.
• Contract classification, permit ownership, and equipment control should be documented.

Common questions

Were painting and sandblasting service charges taxable?

The ruling described those service charges as nontaxable but taxed the contractor's purchases used to perform them.

Did the customer's direct pay permit protect the contractor?

No. The contractor was not the permit holder.

Who controlled the equipment?

The contractor's employees operated it; the customer did not possess or control it.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, 58.1-610(A), and 58.1-624(D).
• 23 VAC 10-210-410 and 23 VAC 10-210-2000.
• P.D. 89-191.

Subject

Assessment for untaxed purchases for use in mechanical service contracts in Virginia

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-21

Original ruling text

March 27, 2007

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 2004 through December 2004.

FACTS

The Taxpayer, located outside Virginia, is a mechanical contractor that provides painting, sandblasting, repair, pressure washing and general cleaning services for its customers. As a result of the Department's audit, an assessment was made for certain untaxed purchases for use in mechanical service contracts in Virginia.

The Taxpayer maintains that the untaxed items assessed in the audit were purchased for resale and subsequently sold to the customers for whom the Taxpayer was performing the contract work. The customer provided the Taxpayer with a direct payment permit for the contract work. The Taxpayer contends that receipt of the direct payment permit makes the customer responsible for payment of any taxes due on the Taxpayer's purchases used in the performance of the contracts.

DETERMINATION

Contractors and Service Providers

Virginia Code § 58.1-610 A provides that any person who contracts to perform construction, reconstruction, installation, repair or any other service with respect to real estate or fixtures thereon and who furnishes tangible personal property is deemed to have purchased the tangible personal property for use or consumption.

Title 23 of the Virginia Administrative Code (VAC) 10-210-410 further provides that "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 or similar contracts."

Title 23 VAC 10-210-2000 states that the tax does not apply to the charges for services performed by painters and paperhangers. They are consumers of all tangible personal property used by them and must pay the tax to their suppliers on purchases of paint, wallpaper, supplies, equipments, etc. The same policy that applies to painting services also applies to sandblasting services. Therefore, charges made to customers for painting and sandblasting services are not subject to Virginia retail sales tax. However, the Taxpayer will be liable for the Virginia sales and use tax on the cost price of all equipment, materials, paints, supplies and other tangible personal property used in connection with sandblasting and painting contracts performed in the Commonwealth. This is consistent with Public Document 89-191 (6/27/89).

The Taxpayer is a contractor with respect to real estate and a provider of nontaxable services such as painting and sandblasting. In both cases, the Taxpayer is deemed the taxable user and consumer of all tangible personal property it purchases. As the taxable user and consumer of all articles of tangible personal property furnished under real property or service contracts, the Taxpayer is required to pay sales tax or accrue use tax on any materials purchased or imported into Virginia. Based on Title 23 VAC 10-210-410 and Title 23 VAC 10-210-2000, the auditor properly treated the Taxpayer as the user and consumer of purchases used to perform contract services.

Direct Payment Permit

Virginia Code § 58.1-624 sets out the provisions for a direct pay permit. Subsection D provides 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 . The Taxpayer, in this instance, is not the permit holder. Therefore, the dealer must collect and remit tax with respect to sales, distributions, leases or storage of tangible personal property to the Taxpayer.

In this instance, the Taxpayer is not a dealer reselling the items at issue to its customers, but rather a contractor and service provider. The Taxpayer is the user and consumer of tangible personal property purchased and used in connection with the mechanical service contracts. The Taxpayer is required to pay the tax on such purchases. The direct pay permit number provided by its customer does not relieve the Taxpayer from its responsibility to remit the tax on purchases of materials used in connection with the mechanical service contracts.

Equipment Rental

Virginia Code § 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Virginia Code § 58.1-602 defines the term "lease or rental" to mean "the leasing or renting of tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property."

Based on the above statutes, there is no legal basis for the customers to pay the Virginia use tax on the rental and use of equipment by the Taxpayer in performing the mechanical service contracts. Furthermore, language on the invoices provided by the Taxpayer state, "All rental equipment provided by Contractor [the Taxpayer] was operated by Contractor [the Taxpayer] employees. [The customer] did not take possession nor exercise control of the rented equipment." The payment of the tax was solely the responsibility of the Taxpayer.

CONCLUSION

Based on the foregoing, there is no basis for revising the audit. According to the Department's records this assessment has been paid in full; therefore, no refund will be issued.

The Code of Virginia and regulation sections cited, along with other reference documents, 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 about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/56332.i