How did Virginia sales and use tax apply to modular duplexes and site-work materials installed for a U.S. Navy construction project?

Subject

Installation of modular duplexes by the Taxpayer/Vendor, Taxable Consumer

Plain-English summary

An out-of-state construction company contracted with the U.S. Navy to build eight modular duplexes at a Virginia military installation. It proposed applying Virginia's reduced 60% modular-building tax base broadly across the project. The Department rejected that approach.

The ruling assumed, without independent verification, that the duplexes met the statutory definition of modular buildings. If the construction company bought and installed them, the company was the taxable consumer, and the Virginia vendor was to collect tax on 60% of its sales price for the duplexes. If the vendor furnished and installed them, the vendor became the real property contractor and taxable consumer, with the precise measure depending on whether it bought the units, manufactured them principally as a contractor, or principally operated as a retailer.

The 60% rule did not extend to site-work materials. Foundation materials, walkways, driveways, fences, sewers, water lines, curbing, electrical lines and connections, lighting, and similar materials were taxable at 100% of cost to the contractor or subcontractor that furnished and installed them. Because a real property construction contract was treated as a nontaxable service, the contractor was not to pass sales or use tax through as a separately stated tax to the Navy; it could account for its tax cost in its bid.

What this means for you

• The special 60% base was limited to qualifying factory-built modular buildings, not the whole construction contract.
• The party that furnished and installed property was generally the taxable consumer, so installation responsibility controlled who paid the tax.
• Site-work materials remained fully taxable at cost even when the modular units qualified for the reduced base.
• The ruling relied on an unverified modular-building assumption; failure to meet the statutory definition would eliminate the 60% treatment.

Citations and references

• Va. Code § 58.1-602, modular-building definition.
• Va. Code § 58.1-610 A, real property contractor treatment.
• Va. Code § 58.1-610.1, 60% taxable base for qualifying modular buildings.
• 23 VAC 10-210-410 A and E, real property contractors and dual-capacity businesses.
• Tax Bulletin 00-3 / P.D. 00-109 (June 20, 2000).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-47

Original ruling text

April 26, 2007

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting a ruling on the application of the retail sales and use tax to modular duplexes purchased by * (the "Taxpayer"). I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a construction company located outside Virginia. It has entered into a contract with the United States Navy to build eight modular duplexes to be located at a Virginia military installation. The Taxpayer plans on purchasing these duplexes from a Virginia vendor.

The Taxpayer believes that the project is subject to the provisions of Va. Code § 58.1-610.1, as set out, in part, as follows:

The retail sale of a modular building, as defined by § 58.1-602, by a modular building manufacturer or modular building retailer, as defined by § 58.1-602, shall be subject to the tax authorized by this chapter upon sixty percent of the retail sales price.

The Taxpayer proposes that the total project price times 60% would be taxable at the current 5% tax rate to the United States Navy. Under the Taxpayer's proposal, the building manufacturer would pay taxes on its part of the project for materials and labor incorporated into the building. The Taxpayer states that it would subtract from the contract amount the building value and pay a 5% sales tax to Virginia on the remaining value of the contract. In the example provided, however, the Taxpayer's calculates that it would pay sales tax based on 60% of the remaining contract value that appears to consist of site work materials.

RULING

Although the Taxpayer claims that the modular duplexes are modular buildings as defined by Va. Code § 58.1-602, such claim has not been established by the facts presented or otherwise verified or documented. Therefore, for purposes of providing this response, the modular duplexes are presumed to be modular buildings as so defined by the above statute. If this presumption is incorrect, the 60% rule exception set out in Va. Code § 58.1-610.1 would be inapplicable.

The facts presented also do not show who is responsible for installing the modular buildings to the permanent foundations at the military installation. Accordingly, this response addresses the tax consequences of installation by either the Taxpayer or its modular duplex vendor.

Installation of modular duplexes by the Taxpayer

If the Taxpayer furnishes and installs modular buildings, then the Taxpayer is deemed the taxable consumer of the modular buildings. In this scenario, the Virginia vendor should be registered to charge and collect from the Taxpayer the sales tax based on 60% of the vendor's sales price for the modular duplexes. See Tax Bulletin 00-3 [Public Document 00-109 (6/20/00)].

The 60% rule for modular buildings as set out in Va. Code § 58.1-610.1 has no application to site work materials. As such, a contractor is liable for the sales tax based on 100% of the cost of such materials. Site work materials include, but are not limited to, the foundation materials (bricks, mortar, rebar, and blocks), and other materials used for walkways, driveways, fences, sewers, water lines, curbing, electrical lines and connections, and lighting. Accordingly, when it furnishes and installs site work materials, the Taxpayer should pay the Virginia 5% sales or use tax based on 100% of the cost price of the site work materials. If the Taxpayer hires a subcontractor to furnish and install some or all of the site work, then the subcontractor would be liable for the tax based on 100% of its cost of materials used or consumed in such site work.

Because real property construction contracts are treated as nontaxable services under Virginia law [see Va. Code § 58.1-610 A], a real property construction contractor should not pass on the sales or use tax as a tax when performing real property construction contracts. It should take into account the sales tax when submitting bids. For the basic rules on real property contractors, see Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A.

Installation of modular duplexes by the vendor

If the vendor contracts to furnish and install modular buildings, the vendor is deemed a real property contractor and the taxable consumer of the modular buildings. In such instances, the vendor would be liable for the sales or use tax based on 60% of the vendor's cost for the modular building, such as when it buys the modular building from the modular building manufacturer. If the installation vendor is the modular building manufacturer, then it pays the sales and use tax either on its cost of materials used in constructing the modular building at the factory site (if exclusively or principally a real property contractor) or on the fabricated cost price of the factory-built modular building (if principally a retailer). For dual capacity rules, refer to Title 23 VAC 10-210-410 E.

CONCLUSION

Based on this ruling, the Taxpayer's proposal is not acceptable under either of the above installation conditions. As noted above, the tax consequences depend upon who performs the installation of the modular building, as well as the site work. Although modular. buildings as defined by Va. Code § 58.1-602 are subject to a reduced taxable base using 60% of the retail sales price of the factory-built modular building, site work materials are fully subject to the tax at 100% of the sales price of such materials.

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. If the modular duplexes do not meet all of the criteria of the definition of "modular building" as set out by Va. Code § 58.1-602, this ruling is voided.

The Code of Virginia sections, regulations and tax bulletin 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/1-705079619R