Could a bank-equipment installer treat permanently installed and monitored-service equipment as exempt retail sales to federal credit unions?

Subject

Taxpayer is a real property contractor and a provider of monitored services

Plain-English summary

A company sold and installed bank equipment. Some items remained tangible personal property, while building-mounted ATMs, after-hours depositories, drive-up teller systems, and vaults became part of the realty. The company also furnished equipment for monitored alarms and closed-circuit surveillance. It collected sales tax as a retailer except when customers, including federal credit unions, presented exemption certificates.

Virginia upheld use tax on the contested equipment. The company was the taxable consumer when it permanently installed equipment as a real-property contractor or used equipment to provide monitoring and surveillance services. The federal credit unions' exemption did not apply to the company's own contractor or service-provider liability. No evidence showed that a credit union's credit was directly bound or that the company was its officially designated purchasing agent.

What this means for you

• Equipment that becomes part of a building is generally consumed by the installer rather than resold as tangible personal property.
• Equipment furnished in performing a monitoring or surveillance service can also be taxable to the service provider.
• A government customer's exemption certificate does not eliminate the contractor's own tax unless the specific purchasing-agent requirements are met.

Citations and references

• Va. Code § 58.1-610(A), contractors as users or consumers.
• 23 VAC 10-210-410(A) and (J), contractor purchases and government contracts.
• 23 VAC 10-210-230, monitored alarm systems.
• U.S. v. Forst, government-contractor purchases subject to Virginia sales and use tax.
• P.D. 91-166, P.D. 94-207, and P.D. 86-125, treatment of the listed bank and surveillance equipment.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-84

Original ruling text

May 25, 2007

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period January 2002 through December 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer sells and installs bank equipment. Some of the bank equipment remains tangible personal property upon installation, such as freestanding automatic teller machines (ATMs) and under-counter safes. Some of the bank equipment becomes a part of the realty upon installation, such as ATMs installed in the side of bank buildings, after hour depositories, drive up teller remote (tubing) systems, and vaults. Some bank equipment is also furnished and installed in connection with the provision of services, such as monitored alarm systems and closed circuit television surveillance systems.

During the audit period, the Taxpayer treated itself as a retailer of all items that it sold and installed, including the permanently installed items and the service related items. This action resulted in the Taxpayer collecting sales tax on the retail sales price of all items sold except for those items installed for exempt customers, such as federal

credit unions.

As a result of the audit, the Taxpayer was determined to be a real property contractor and a provider of monitored services. Accordingly, the Taxpayer was held as the taxable consumer of the bank equipment that it permanently installed or furnished in connection with the provision of monitored services. The Taxpayer was assessed consumer use tax only on items permanently installed for exempt customers, e.g. , the federal credit unions. The Taxpayer disputes the assessment and believes it should continue to treat itself as a retailer.

DETERMINATION

Virginia Code § 58.1-610 A generally treats real property construction contractors as the taxable users or consumers of tangible personal property that becomes a part of realty upon installation. Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A also provides that "[n]o sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency, a public service corporation, a nonprofit school, or nonprofit hospital, or on the ground that the contract is a cost-plus contract." In other words, the contractor's purchases are taxable even if a governmental entity, such as a federal credit union, is a party to the contract.

Title 23 VAC 10-210-410 J further provides generally that, the tax applies to all purchases of tangible personal property by contractors for their use or consumption in connection with real property construction contracts with the government. This regulation also states, "Only in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax." As such, the regulation is consistent with U.S. v. Forst , 442 F.Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978), which upheld the application of the Virginia sales and use tax to purchases made by a government contractor.

In this case, no evidence has been presented that the credit of the federal credit union was bound directly to the Taxpayer's purchases or that the Taxpayer was officially designated a purchasing agent of the federal credit union. Accordingly, the government exemption is not available to the Taxpayer.

The audit basically assesses tax on six categories of banking equipment as shown below. For each equipment category, there is already a published precedent that establishes the Department's policy on the matter. The Public Documents (P.D.) that relate to each issue are as follows:

After hour depositories - see P.D. 94-207 (6/28/94)

Monitored alarm systems - see P.D. 91-166 (8/7/91) and Title 23 VAC 10-210-230 Automatic teller machines (ATMs) - see P.D. 91-166

Closed circuit surveillance television systems - see P.D. 86-125 (7/11/86)

Drive up teller remote systems - see P.D. 94-207

Vaults - see P.D. 94-207

The above-cited public documents establish that a taxable use is deemed made by the contractor furnishing and permanently installing the equipment or using the equipment in the provision of services. Absent evidence to the contrary, the Taxpayer is deemed the taxable user or consumer of all of the contested items in this case.

Further, the application of the tax to the contested items is based on long­standing policy that was available to the taxpayer via the Department's website. Also, the Taxpayer has been registered since 1996, and pursuant to Title 23 VAC 10-210-20, could have requested a ruling from the Department to receive the necessary tax guidance for its specific situation.

Moreover, exemption certificates, such as the Form ST-12, presented by federal credit unions are only applicable to exempt retail sales of tangible personal property made to federal credit unions. Such exemption certificates, as well as the government exemption applicable to federal credit unions, have absolutely no application to a tax liability directly incurred by a real property contractor or service provider, such as the Taxpayer.

Under Virginia law and regulations, the Taxpayer is deemed the taxable user or consumer of banking equipment permanently installed in Virginia or used or consumed in connection with transactions for the provision of surveillance and monitoring services.

CONCLUSION

Based on this determination, the assessment is correct. An updated 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 **.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty. See the enclosure entitled "Important Payment Information."

The Code of Virginia section, 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 Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/56304R