Did construction materials stored temporarily in Virginia qualify for exemption when shipped to embassy projects in countries imposing VAT?

Subject

Taxpayer contends materials qualify for the temporary storage exemption provided

Plain-English summary

Virginia found that the foreign-tax condition for the temporary-storage exemption was met because the countries imposed value-added tax, not retail sales tax. Under Va. Code § 58.1-609.3 1, a contractor could exempt construction materials stored temporarily in Virginia before shipment to another state or country if the materials could be purchased there free from sales tax and were incorporated into qualifying real-property construction.

The Department distinguished a VAT from a retail sales tax: a VAT applies to value added at stages of production and distribution, while a sales tax is imposed as a percentage of the retail sales price and collected by the retailer. Because the four countries used VAT, the materials could be purchased there free of retail sales tax for purposes of the Virginia provision.

The exemption was not automatic. The auditor still needed evidence that the contested materials were actually incorporated into U.S. embassy real property in the identified countries. Equipment, tools, and supplies used to perform the contracts were outside the construction-material exemption.

What this means for you

• A foreign VAT did not count as a retail sales tax under this ruling's temporary-storage analysis.
• The contractor must connect each stored purchase to materials incorporated into qualifying out-of-state or foreign real property.
• Tools, equipment, and consumable supplies used on the project remain taxable under the cited rule.
• Keep shipping, job-cost, and installation records that let an auditor trace Virginia-stored materials to the foreign project.

Common questions

Q: Did a VAT prevent the exemption?
A: No. The Commissioner treated VAT as materially different from retail sales tax, so the sales-tax-free condition was satisfied.

Q: Was the assessment immediately removed?
A: Not yet. The taxpayer had 30 days to prove that the contested materials were incorporated into embassies in the identified countries.

Q: Did the exemption cover tools and equipment used on the embassy jobs?
A: No. The ruling limited it to construction materials incorporated into real property.

Citations and references

• Va. Code § 58.1-609.3 1.
• 23 VAC 10-210-410(1).
• P.D. 00-81 (May 11, 2000).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-156

Original ruling text

August 29, 2008

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 September 2000 through March 2006. I apologize for the delay in responding to your letter.

FACT

The Taxpayer is an electrical contractor. The Taxpayer takes exception to the consumer use tax assessed on construction materials temporarily stored in Virginia and subsequently incorporated into real property projects at various U.S. embassies throughout the world. The Taxpayer contends that these materials qualify for the temporary storage exemption provided in Va. Code § 58.1-609.3 1.

For the sample period, the Taxpayer asserts that it provided contract services in *, , , and ***. The Taxpayer contends it could have purchased the construction materials in these foreign countries exempt from sales tax. In support of its position, the Taxpayer furnishes evidence showing the various taxes imposed by these four countries.

DETERMINATION

Virginia Code § 58.1-609.3 1 provides an exemption from the Virginia retail sales and use tax for:

Personal property purchased by a contractor which is used solely in another state or in a foreign country, which could be purchased by such contractor for such use free from sales tax in such other state or foreign country , and which is stored temporarily in Virginia pending shipment to such state or country. [Emphasis added.]

This provision exempts from tax a contractor's purchases of construction materials that are temporarily stored in Virginia pending shipment outside of Virginia for incorporation into an exempt real property construction project. The exemption is restricted to construction materials that are to be incorporated into real property construction and could be purchased free from sales or use tax by the contractor in the other state or nation. The tax applies, however, to property that is not incorporated into realty, such as equipment, tools, supplies, etc., used in the performance of the construction project. See Title 23 of the Virginia Administrative Code 10-210-410(1).

The information furnished on the four countries shows that all four countries impose a value added tax (VAT), rather than a true sales tax. There are differences between these taxes as explained in Public Document 00-81 (5/11/00). For instance, a sales tax is levied as a percentage of the retail sales price of merchandise and collected by the retailer. On the other hand, a VAT is levied on the value added to a product or service at each stage of the production and distribution process. Because the VAT differs significantly from a retail sales and use tax in both design and imposition, a VAT does not constitute a true sales tax.

For these reasons, I find that the requirement in Virginia Code § 58.1-609.3 1 that personal property could be purchased free from sales tax is satisfied when a foreign country imposes a VAT rather than a sales tax. That is, the Taxpayer could have purchased the construction materials free of sales tax in the foreign countries at issue because they do not impose a retail sales and use tax. The Taxpayer has furnished convincing evidence of this sales tax free requirement for the four noted countries. 1

I understand, however, that the auditor lacks sufficient information to determine that the contested purchases were subsequently incorporated in embassies located in the four noted countries. Accordingly, the Taxpayer must provide evidence of its claim to the auditor that all of these materials were incorporated in embassies located in the four countries.

CONCLUSION

The requested information should be furnished to the auditor within 30 days of the date of this letter. The auditor will contact you soon to arrange for the receipt of the requested information.

If the auditor is satisfied with the requested information, he will revise the audit and send a revised bill (if necessary), with interest accrued to date, to the Taxpayer. Otherwise, the assessment will be deemed correct as issued and an updated bill will be sent to the Taxpayer. The outstanding balance of the revised or updated bill should be paid within 30 days of the bill 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 Code of Virginia section, the regulation, and the public document 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 Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1538794640.R

1 As an additional part of the appeal, you furnish copies of emails in regard to embassy projects in *, and . We have confirmed that these three countries impose VAT rather than a retail sales and use tax. In *** the sales tax was replaced by a VAT in 1998.