Who owed Virginia sales or use tax when modular-home manufacturers, retailers, customers, or contractors handled the sale and installation?

Subject

Modular home transactions.

Plain-English summary

Virginia answered 12 modular-home scenarios by separating retail sales from real-property installation contracts. Under the law and rates stated in the 2008 ruling, a registered seller making a retail sale generally collected 5% tax on 60% of its selling price for the modular sections. If the customer handled installation or hired an independent installer, the seller-to-customer transaction was treated as the retail sale.

When a retailer or manufacturer furnished and permanently installed the modular building, that party was generally the consuming real-property contractor. Depending on the facts, it owed tax on the manufacturer's 60% selling-price base, on purchased materials, or on fabricated cost. Registration and a valid resale certificate mattered: an unregistered retailer could not claim a resale exemption.

For out-of-state manufacturers, Virginia nexus determined whether the manufacturer had to register. If an unregistered out-of-state seller made a retail sale to a Virginia retailer that installed the home, the Virginia retailer reported consumer use tax. The ruling also described separate rules for manufacturers operating only as contractors or in the dual capacity of retailer and contractor.

What this means for you

• Identify who is responsible for permanent installation before deciding which transfer is the retail sale.
• Registration affects collection duties and whether a purchaser may use a resale exemption certificate.
• Manufacturer-contractors must distinguish retail inventory from materials withdrawn for their own installation work.
• The 5% rate and 60% retail base are the historical rules stated in this 2008 ruling; current transactions require current-law review.

Common questions

Q: What if the retailer installs the modular home?
A: The retailer is generally the consuming real-property contractor. The seller may collect tax from it, or the retailer may owe consumer use tax, depending on the seller's registration and the scenario.

Q: What if the customer handles installation?
A: The retailer makes a retail sale to the customer and, if registered, collects tax under the historical 60%-of-sales-price rule described in the ruling.

Q: Could an unregistered retailer buy the modular sections exempt for resale?
A: No. The ruling says the retailer had to be registered and provide a valid resale exemption certificate.

Q: Did the same rules apply to out-of-state manufacturers?
A: The transaction rules did, but an out-of-state manufacturer's duty to register depended on whether it had sufficient Virginia nexus under Va. Code § 58.1-612 C.

Citations and references

• Va. Code §§ 58.1-610 and 58.1-612 C.
• 23 VAC 10-210-6000.
• 23 VAC 10-210-410 D and E.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-105

Original ruling text

June 20, 2008

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request a ruling on behalf of the *. I apologize for the delay in responding to your letter.

FACTS

You present a number of scenarios for modular home transactions. For each scenario, you want to know what party is responsible for paying the Virginia sales or use tax.

In your scenarios, certain words have special meanings. Although the word 'dealer' is not used, you identify the parties as 'Virginia manufacturer' or 'Virginia retailer' with a modular home business located in Virginia. Your references to 'registered' mean registration with the Virginia Department of Taxation. Your references to 'customer' mean the customer who purchases and thereafter resides in the modular home. Your reference to 'set up' refers to the installation of a modular home.

RULING

Each scenario is shown below followed by our response. Special rules may apply to the Virginia or out-of-state manufacturers. See Special Rules Note.

Scenario #1

A Virginia manufacturer is not registered. It sells to a Virginia retailer without set up. The Virginia retailer is also not registered. The Virginia retailer handles set up and sells to a Virginia customer.

Response:

The Virginia retailer is ultimately liable for the sales and use tax because it is deemed the real property installation contractor. The Virginia retailer must pay the Virginia use tax based on 60% of the sales price of the modular building as charged by the manufacturer. Because it is not registered, the Virginia retailer would need to register in order to remit and report the consumer use tax.

NOTE: In this scenario, the Virginia manufacturer must register to collect the Virginia sales tax if it is likely it will be making four or more retail sales ( i.e. , sales without installation made to the final consumer) in a calendar year. Upon audit, the sales activities of the manufacturer will be examined to determine if it should have been registered for the collection of the sales tax. Furthermore, the Virginia manufacturer must comply with the Special Rules Note shown below, especially if it operates in a dual capacity of retailer/reseller and contractor.

Scenario #2

A Virginia manufacturer is not registered. It sells to a Virginia retailer without set up. The Virginia retailer is registered. The Virginia retailer handles set up and sells to a Virginia customer.

Response:

Same as Response #1, except the Virginia retailer is already registered to pay and report the consumer use tax. Also, the NOTE in Response #1 is applicable to Scenario #2.

Scenario #3

A Virginia manufacturer is not registered. It sells to a Virginia retailer without set up. The Virginia retailer is registered. The Virginia retailer does not handle set up and sells to a Virginia customer.

Response:

If the Virginia customer handles set up or hires an independent contractor to perform the set up duties, then a retail sale is made by the Virginia retailer to the Virginia customer. In such instances, the Virginia retailer must charge and collect the Virginia retail sales tax of 5% based on 60% of the retailer's sales price for the modular housing sections. A separately stated transportation charge for transporting the modular sections to the building site is exempt of the tax. See Title 23 of the Virginia Administrative Code (VAC) 10-210-6000.

If the Virginia retailer hires an independent contractor to handle set up, the retailer is considered the consuming contractor of the modular sections. In such instances, the Virginia retailer must remit and report the consumer use tax to the Virginia Department of Taxation.

NOTE: The Virginia manufacturer must comply with the Special Rules Note.

Scenario #4

A Virginia manufacturer is registered. It sells to a Virginia retailer without set up. The Virginia retailer is registered. The Virginia retailer handles set up and sells to a Virginia customer.

Response:

The transaction is a retail sale made by the Virginia manufacturer to the Virginia retailer because the Virginia retailer permanently installs the modular building. Thus, the Virginia retailer is acting as a contractor and is considered the ultimate consumer. Because the Virginia manufacturer is a registered dealer and makes a retail sale, it should collect and remit the Virginia retail sales tax of 5% based on 60% of the manufacturer's sales price of the modular building.

NOTE: The Virginia manufacturer must comply with the Special Rules Note.

Scenario #5

A Virginia manufacturer is registered. It sells to a Virginia retailer without set up. The Virginia retailer is not registered. The Virginia retailer handles set up and sells to a Virginia customer.

Response:

Same as Response #4.

Scenario #6

A Virginia manufacturer is registered. It sells to a Virginia retailer without set up. The Virginia retailer is not registered. The Virginia retailer does not handle set up and sells to a Virginia customer.

Response:

The retailer can make an exempt purchase for resale only if it is registered with the Department and presents to the manufacturer (or the manufacturer has on file from the retailer) a valid resale exemption certificate. Because the Virginia retailer is not registered to collect the Virginia retail sales tax, it cannot claim the resale exemption. Thus, under this scenario, the Virginia manufacturer must collect the Virginia retail sales tax from the Virginia retailer and remit it to the Virginia Department of Taxation.

If the Virginia retailer becomes registered to collect the Virginia retail sales tax, the retailer would be liable for collection of the sales or use tax from the Virginia customer because the Virginia customer apparently handles set up or hires an independent contractor to perform the set up duties.

When registered, the Virginia retailer should collect the 5% retail sales tax based on 60% of the retailer's sales price for the modular housing sections.

NOTE: The Virginia manufacturer must comply with the Special Rules Note.

Scenario #7

An out-of-state manufacturer is not registered. It sells to a Virginia retailer without set up. The Virginia retailer is not registered. The Virginia retailer handles set up and sells to a Virginia customer.

Response:

Under the described circumstances, a retail sale is made by the out-of-state manufacturer to the Virginia retailer who is the ultimate consumer in this scenario. Because the out-of-state manufacturer is not registered to collect the Virginia use tax, no Virginia use tax may be collected by the manufacturer. However, because the Virginia retailer is the ultimate consumer in this scenario, it must report and remit the Virginia consumer use tax of 5% based on 60% of the manufacturer's sales price for the modular building sections.

NOTE: If the out-of-state manufacturer has sufficient nexus with Virginia, it must register to collect the Virginia retail sales and use tax. However, if it does not satisfy the nexus criteria set out in Va. Code § 58.1-612 C, then it is not required to register for the collection and remittance of the Virginia retail sales and use tax. Furthermore, the out-of­-state manufacturer is subject to the Special Rules Note.

Scenario #8

An out-of-state manufacturer is not registered. It sells to a Virginia retailer without set up. The Virginia retailer is registered. The Virginia retailer handles set up and sells to a Virginia customer.

Response:

Under the described circumstances, a retail sale is made by the out-of-state manufacturer to the Virginia retailer. Because the out-of-state manufacturer is not registered, the Virginia retailer (as a using or consuming contractor) must report and remit the consumer use tax of 5% based on 60% of the out-of-state manufacturer's sales price for the modular building sections.

NOTE: If the out-of-state manufacturer has sufficient nexus with Virginia, it would be required to register for the collection and remittance of the Virginia retail sales and use tax. See Va. Code § 58.1-612 C. Furthermore, the out-of-state manufacturer is subject to the Special Rules Note.

Scenario #9

An out-of-state manufacturer is not registered. It sells to a Virginia retailer without set up. The Virginia retailer is registered. The Virginia retailer does not handle set up and sells to a Virginia customer.

Response:

The initial transaction between the out-of-state manufacturer and the Virginia retailer is not a retail sale. Rather, the initial transaction is for resale purposes and is exempt of the tax. However, the second transaction between the Virginia retailer and its customer is a retail sale as it appears that the Virginia customer is the one performing set up or hires an independent contractor to perform set up. In such instances, the Virginia retailer would be responsible for collecting the Virginia retail sales tax from the Virginia customer ( i.e. , collecting a 5% tax based on 60% of the Virginia retailer's sales price for the modular sections) and remitting such tax to the Virginia Department of Taxation.

Scenario #10

An out-of-state manufacturer is registered. It sells to a Virginia retailer and handles set up. The Virginia retailer is registered and sells to a Virginia customer.

Response:

The transaction between the out-of-state manufacturer and the Virginia retailer constitutes a service with respect to real property and is taxable in accordance with Va. Code § 58.1-610. In this scenario, the out-of-state manufacturer is considered a real property services contractor and ultimately liable for the Virginia consumer use tax on all modular housing materials and other construction materials that it uses to affix the modular building sections to the realty. The out-of-state manufacturer is subject to the Special Rules Note and needs to determine whether it pays the consumer use tax based on the cost price or fabricated cost price of materials. See Title 23 VAC 10-210-410 E.

Under this scenario, the Virginia retailer is not liable for the retail sales or use tax on materials furnished and permanently affixed to the realty by the out-of-state manufacturer.

Scenario #11

An out-of-state manufacturer is registered. It sells to a Virginia retailer and handles set up. The Virginia retailer is not registered and sells to a Virginia customer.

Response:

Same response as given for Response #10.

Scenario #12

Scenario #12 is the same scenario provided for Scenario #11. Therefore, the response is the same as given for Response #10.

SPECIAL RULES NOTE

Pursuant to Title 23 VAC 10-.210-410, special rules are applicable to all in-state and out-of-state manufacturers, including modular building manufacturers that are dealers registered or required to be registered for the collection of the Virginia retail sales and use tax, contractors required to pay the Virginia consumer use tax or sales tax on their purchases, or both. Those special rules have been modified (as shown below) to take into account the reduced taxable base for retail sales of modular buildings.

Contractor only. If all sales of a modular building manufacturer in Virginia include real property services ( e.g ., set up and installation of a building), the manufacturer is deemed a contractor and is ultimately liable for payment of the Virginia retail sales or use tax on all tangible personal property purchased for use or consumption in Virginia. In such instances, the manufacturer must pay the Virginia retail sales tax if it is charged on the supplier's invoice. If no Virginia retail sales tax is charged on the supplier's invoice, the manufacturer must report and pay the consumer use tax based on the cost price of raw materials and prefabricated components that it purchases and uses in constructing modular building sections and on the cost price of any additional raw materials and prefabricated components that it uses in the installation of the modular sections at the Virginia job site. See subsection D of Title 23 of the VAC 10-210-410.

Dual capacity: When operating as both a retailer/reseller and contractor. If operating in a dual capacity of fabricating for sale or resale and fabricating for its use or consumption ( i.e ., acting as a contractor by providing real property services in connection with the sale of a modular building), a modular building manufacturer (regardless of whether in-state or out-of-state) must follow the rules set out by subsection E of Title 23 VAC 10­210-410. However, when modular building sections are sold at retail, a reduced taxable base applies ( i.e ., the 60% rule). Further rules are set out below to distinguish between those operators that are principally a retailer/reseller and those that are principally engaged as a contractor.

Dual capacity: When principally a retailer. If operating principally as a retailer and/or reseller, a modular building manufacturer must generally collect the retail sales tax of 5% based on 60% of the sales price of any modular building sections sold at retail. It must also pay the tax on the 'fabricated cost price' of items (including modular building sections) withdrawn from a resale inventory when the manufacturer is responsible for the permanent installation of such items in Virginia. The fabricated cost price is the cost of materials, labor and overhead charged to work in process.

Dual capacity: When principally a contractor. If operating principally as a contractor ( i.e. , sales include real property services such as installation and set up), the modular building manufacturer pays; the tax in accordance with subsection D of Title 23 VAC 10-210-410 for those transactions that constitute real property service contracts ( i.e ., where the manufacturer is responsible for installing the modular building sections onto a permanent foundation). For retail sales made to Virginia customers, the modular building manufacturer is responsible for collecting and remitting the retail sales or use tax to the Virginia Department of Taxation. For retail sales made by a modular building manufacturer principally operating as a contractor, the special rules for retail sales set out in subsection E of Title 23 VAC 10-210-410 apply (see above).

CONCLUSION

This response is based on the facts provided and the scenarios presented. Any change in the facts presented or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections 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 Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1868481503.R-1